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Governments in need of a technological update

The big economic question in much of the world today is usually framed as the fight between advocates of austerity and advocates of growth. But another way to view the debate is as a contest between those who think that 21st-century government can be effective and those who don't.

Some of the most outspoken U.S. capitalists have begun to fight the "Buffett rule," which would set a minimum tax level for millionaires, and other calls to raise taxes for those at the very top, with the argument that money is best left in the bank accounts of the superrich because they are more effective at using it than the state is.

"I'm a job creator. I'm one of the guys who can help us out. I'm a Silicon Valley guy who can invent and create," T.J. Rodgers, chief executive officer of Cypress Semiconductor, told me. "If you tax me more, I will either give less to charity or I will fund venture companies less, or I will sell the stock in my own company or other companies I own, like Intel and Google. I will do one of those three things to return the money to the government."

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If that were to happen, he said, the U.S. economy would be hurt, because he is better at investing money than government bureaucrats are.

Edward Conard, a former partner at Bain Capital, the buyout firm once led by Mitt Romney, the Republican presidential candidate, makes the same point in his new book Unintended Consequences. Like Mr. Rodgers, he argues that society benefits over all when the rich are taxed lightly because the rich – by virtue of their wealth – have shown they are the best investors of capital.

As Mr. Conard writes: "For every dollar earned by a successful innovator or lucky risk taker, society captures forty cents of investment. Were society to pay the incremental dollar of income to a middle-class consumer, he would charge society ninety to ninety-nine cents of consumption for every penny of investment – a steep price. It's cheaper for society to allocate income to the rich."

There's a lot to unpack in this line of reasoning. For one thing, it is hard to escape the obvious self-interest: It is certainly convenient to believe that low taxes for oneself are not only a personal boon, they also serve the collective good. The debate is also ideological. The right has long been campaigning to reduce the power of the state and to increase the power of the individual.

But there is also a special resonance to arguments about the relative efficacy of the private sector over the state when you hear them in the 21st-century United States from a West Coast tech entrepreneur. It is hard to disagree that in recent decades, when it comes to transforming the world, the Valley has outdone legislatures.

One reason for that gap may be that while our private and business lives have been transformed by the technology revolution, government largely has not. To understand what hasn't happened – and future possibilities – I spoke to another entrepreneur at the cutting edge of the tech revolution: Nandan Nilekani, co-founder of an Indian outsourcing behemoth, Infosys.

He has gone on to another pioneering job, working inside the notoriously slow-moving Indian government to create a unique digital identity for each citizen. That second career has given him a different perspective on the state: He agrees that it needs to be reinvented, but he also argues that it is absolutely essential, not least as a foundation for private sector entrepreneurship.

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"Just as technologies are disrupting industries – retail, or publishing, or whatever – technologies can also disrupt the way you do government. The thing is that we don't yet know how to do it well," he told me.

"If you have grown up using a tablet or a smartphone, with nice user interfaces, and one click, you get everything, you get maps everywhere, you're used to a certain level of responsiveness and efficiency," Mr. Nilekani explained. Government is often not very good at delivering either, he said, which can make us more frustrated as citizens than we are as consumers.

One response to that gap is to give up on the state. But Mr. Nilekani argues that we need to reinvent government, just as the tech revolution forced most businesses to reinvent themselves.

He thinks this transformation of the state is one of the world's most urgent challenges because he believes that without a powerful and effective government, private entrepreneurship is impossible. "Innovation is something best done effectively in the private sector," he said. "But it's the role of governments to create public goods which are platforms for innovation."

Instead of arguing about whether to shrink the state or expand it, or whether money is better spent by the private sector or by the state, maybe we should be focusing more on reinventing the state for the 21st century.

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