Economist Vito Tanzi predicts the shrinking of the modern state, asserts that it has already begun and regards Canada as an early leader in the process. How far will it downsize? In a sense, Mr. Tanzi says, it could return to the roles it once played in the 18th and 19th centuries – "though in a modern version." Government spending would be higher than in days of yore (when Sweden's government, for example, spent 5 per cent of gross domestic product). But taxes would be much lower than they are now.
Make no mistake. Mr. Tanzi expresses a radical perspective. We're talking a time-travel trek back to the 1700s and the 1800s here – when governments required 10 per cent of their respective GDP (or less) to fulfill their responsibilities.
Mr. Tanzi contemplates no return to Dickens. He simply tracks the trajectory of a central conundrum of the 21st century. The state can't survive without the market economy – but the market economy cannot survive the excesses of the state. One must yield to save the other. People once advocated government intervention to fix "market failure." Now people primarily sense "political failure" and look elsewhere for solutions.
Government expanded as long as people perceived it as competent and benevolent. In this period, policy makers – "people who acted on behalf of the State" – were regarded, illusion though it was, as consistently faithful, wise and capable. These policy makers possessed "Solomon's wisdom, Google's knowledge and the honesty of saints," Mr. Tanzi says. "Bureaucrats [were regarded as]comparably efficient."
The exit strategy for the state, Mr. Tanzi says, need not be all that difficult. The state, he says, now operates as a monopoly insurance company, insuring almost everyone against almost every risk. It does so inefficiently. Taken as a whole, the welfare state may now be considered delusional. Almost inevitably, it will end in bankruptcy.
Mr. Tanzi is an internationally respected economist. Italian-born, he served for 20 years as director of fiscal affairs at the International Monetary Fund in Washington. In a career that spans five decades, he taught economics at George Washington University and American University and acted as an adviser to the World Bank, the United Nations and the European Commission. Mr. Tanzi is not "anti-government" for ideological reasons. He goes, he says, where the empirical evidence takes him – which makes his 14th book, Governments Versus Markets: The Changing Economic Role of the State (published in May), so important.
Although pessimistic on the ability of the rich democracies to control spending, Mr. Tanzi cites Canada and Sweden as examples of countries that have begun the process of downsizing government – proving that fiscal discipline is possible. Normally, the public regards governments as "cows that can be milked," he writes. But Canadians and Swedes have come to understand that the cow had been over-milked – and was soon to go dry.
In 1920, the Canadian state consumed 16 per cent of the country's GDP. By the 1990s, it consumed 46 per cent: the pinnacle of the state in Canada. By 2007, it consumed only 39 per cent – and was on track to break through 30 per cent (as targeted in his most recent budget by Finance Minister Jim Flaherty) in the next four years. Assuming that this target is reached, Canada will have shrunk the state by more than 30 per cent – and will have time-travel trekked one half of the way back to 1920.
In 1920, Swedish governments consumed only 10.9 per cent of the country's GDP. The Swedish state reached its pinnacle at 64 per cent in the 1990s. Swedish governments have since shrunk the state to 52 per cent – a withering away of 20 per cent.
Mr. Tanzi concedes that the diminished state will increase economic inequality. But he argues that equality can't be the state's only goal. "If it were," he says, "North Korea and Cuba would be model welfare states." Further, though, he argues that there will be many other ways to reduce inequality – when people are once again lightly taxed. The irony of the 21st century, he says, is that big governments have consistently pre-empted reform – by replacing market functions instead of merely regulating them.