Do Governments Compete? Should They?

From 1950 to 2013, the population of Detroit declined from 1,850,000 to 700,000 – more than 60%. In the same period, the population of the United States increased from 151.3 million to 316.4 million — more than double. This suggests that some people were doing some things better than some others.

If you are a government official and your sole source of revenue is taxes paid to you by residents, you might want to consider policies that keep those residents from leaving and sending their tax dollars to your competitors.

Had Detroit grown at the same rate as the United States, it might now have 3.7 million people or more than five times the current number of taxpayers. Instead of serving as the city’s emergency manager and instantly becoming one of America’s most famous lawyers, Kevyn Orr would be commuting anonymously from Chevy Chase to his downtown Washington office.

Kevyn Orr

Much has changed in the relationship between rulers and the ruled in the eight centuries since the Magna Carta but, even then, the king was sufficiently concerned about losing taxpayers that he included clause 42 making it unlawful for subjects to leave the kingdom. At least with respect to the largest taxpayers, it is hard to see how this would have been a problem as their assets consisted largely of land that would have been difficult to roll up and carry off to some other country.

Now, not so much.


Even freely elected governments have minorities that voted against them. A high-handed approach by the majority might seem a good way to get rid of pesky opponents, but it is less effective when they leave and take their tax dollars with them.

The first stop might be the streets as in much of the Arab world, Turkey, Brazil, Israel, Russia, Chile and even the United States, but the next stop could be someplace that appears more hospitable.

Whatever the league tables may tell you about relative performance, more people are both better educated and members of the middle class (the Holy Grail of taxpayers) than in the past. They have higher expectations and they are more mobile. If political leaders are not responsive, the well educated middle class will find those who are.

And their tax dollars are not all that disappear. Their skills leave too.

Demanding performance of government officials does not make voters hardhearted, flinty eyed, mean-spirited or selfish. It makes them smart. It might look selfish, but they are actually making their communities more attractive than those next door or in the next state.

Why not evaluate the effectiveness of government programs before pouring money into them? Even government employees, who can be counted on to oppose anything that would make them redundant, might well pause to consider who will be left to support their generous retirement programs if taxpayers have become fed up and left.

According to Fred Hiatt in Divided We Stand, “journalist Bill Bishop coined the phrase ‘the big sort” in 2004 to describe the increasing political homogeneity of American living patterns.” If someone does not like his community, he can easily choose another.

While this is divisive if the choice is based on left-right political issues, it might be less so if based on which set of elected officials seems less likely to run your city, state or country into the ditch.

It is hard to find opponents of home ownership (well except, as we have recently learned, by those who can’t pay the mortgage), but few politicians are willing to say that homeownership also makes taxpayers less mobile and thus more likely to stay where they are and absorb the consequences.

Yes, governments compete and their elected officials better serve their constituents by doing so.  It seems ironic that the automobile made Detroit great before taking its inhabitants elsewhere and reducing it to bankruptcy.




One Response to “Do Governments Compete? Should They?”

Stan Hatch, August 13, 2013 at 9:07 pm said:

Your article on Detroit entitled “Do Governments Compete? Should they? “ should make us reflect
about what is happening in the national economy. Our federal budget is growing as a percentage of GNP,
which is our ability to service that debt. To keep interest rates down and spur economic growth, our
government is printing 85 billion a month. To put that in perspective, the budget for the State of California
for an entire year is approximately $145 billion. What is the effect of this?
For one thing, we should not be surprised when there is inflation. Printing money with no growth in
the economy is bound to produce inflation. Secondly, we should not be surprised if the dollar is devalued relative
to other currencies.
The fed is keeping interest rates down now by charging member banks practically zero interest for money
that the member banks lend out. That has driven down interest rates for home loans. However if there is inflation,
we should expect the member banks to raise their rates to customers since they only make money when they
charge more than inflation.
Did Detroit need more social programs and assistance for the poor? Or more jobs? What could Detroit
have done differently? Pittsburgh was once a steel town, but has reinvigorated itself with new business. What
did it do differently?

Are our national social assistance programs encouraging people to go back to work? With a minimum
wage of $7.50, many will stay home. Perhaps the national minimum wage needs to be increased. Someone
who makes $7.50 qualifies for public assistance. Wouldn’t it be better for employers to pay a subsistence wage
instead of employees on the payroll having to apply for public assistance?

The wealthy enjoy some very significant tax breaks in capital gains treatment and dividends. Perhaps
some of those breaks for the wealthy should be cut back to help with the deficit, not to fund more social

National entitlements of all sort need to be evaluated and adjusted so that the benefits paid out are in
balance with the contributions paid in. If the benefits can not be cut back, perhaps more needs to be paid in.

How about more tax credits for business to hire the unemployed here in the US? If we want foreign business
to come here instead of our business going overseas, US corporate tax rates need to be cut. US taxes are much
higher than in other countries. Perhaps those rates can be brought down with new tax credits for hiring in the US,
and many of the other credits now in place should be eliminated.

Our current system allows companies to pay local tax rates overseas and not pay US taxes until the profits
are brought back to the US. That encourages companies to keep their earnings outside the US. We need need
profits from overseas to be reinvested in business in the US as well as in business overseas. Perhaps the corporate
tax code should be changed to encourage it instead of discouraging it.

Are social assistance programs best financed and administered at the local level or the national level? Many want
it done at the national level since the US does not have to balance its budget. But is that a good thing that promotes
efficiency? If it is financed at the national level, it is a contest among the local governments to get as much financing
from the national government as possible. Can our national government really afford it? Can Congress, made
up of 525 legislators, really decide what is best for each locality?

The housing bubble before 2007 definitely had signs that it was overinflated. Many, including lenders, did not take that
risk into account because there just seemed too much money to be made. Is there a similar situation with local
governments competing for the federal dollars? Detroit is now pleading to the US for a bailout. There is precedent.
We did bail out GM and our financial institutions.

When the housing financial market crash happened in 2007, the US government stepped in, sold debt to raise
money and printed it as well. The Fed pumped all that money into the national economy through the banking system.
Will that work again if the national debt is so big and the interest on it so much that our economy can not support

Can we count on China to continue giving us cheap loans? We might look at Germany for some guidance on
that question. Germany is demanding that the other European countries tighten their budgets, and it’s causing riots.

We all agree that a growing economy will solve much of the debt problem, but also need to ask whether what we are doing
really working. Currently both the Democrats and the Republicans are each offering their own approaches without any willingness
to give in to the other side. The result is gridlock. Can we really afford that?

Most of us in the senior generation heard our parents talk about the Great Depression. Let’s hope we do
not have to live through it again to learn what it’s like when there are no jobs. It would be better if we just learned from Detroit.


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