Monday, January 2, 2012

Make them pay

Reflecting on the notion of collective moral hazard, I have been thinking about ways of disaggregating the responsibility for the budget crises facing most advanced democracies. Of course, I don't buy the austerity argument, and I am totally unconvinced that deficit reduction serves any useful purpose in the current climate. But if sacrifices have to be made, how are we supposed to allocate the pain?

In the Italian case, there is a pretty clear line of responsibility. In periods of centre-left rule (1995-2001, 2006-7), the deficit went down, whilst in periods of centre-right rule (up to 1995, and then from 2001 to the present, save the short-lived Prodi II government) deficits have remained stable or increased. The picture is made clear enough here:

So, we can attribute a chunk of the responsibility to the Berlusconi-led centre-right coalition for Italy's failure to reduce its debt substantially over the past two decades (an argument I made here in a piece for Foreign Affairs). We can make a case that citizens who voted for these administrations should therefore be first in line to pay the costs of their mistakes, particularly in view of the fact that the failure to reduce the deficit was also motivated by the need to distribute favours to this very electorate.

In fact, what seems to have happened is that centre-right voters got most of the benefit of deficit spending (in the form of distributive spending and tax concessions, including a light touch for tax evasion) whilst centre-left voters got little direct benefit from the briefer periods of centre-left government, in which the focus was on repairing the damage caused by their opponents (as is indeed the case for the Monti government, so far robustly supported by the centre-left).

So as a matter of social justice, centre-right voters should pay more to get the deficit down. They tend to be wealthier, are more likely to have evaded tax, and are more likely to have received material benefit from the deficit-inducing policies of their governments. But more than all of this, they are directly responsible for the policies followed, in much the same way that drivers of gas-guzzling cars should pay more of the cost for addressing global warming.

Of course, a policy like this is difficult to apply, since voting in Italy, as in all democracies, is by secret ballot. Arguments have been made for changing this, to encourage voters to exercise moral responsibility for their choices (eg here). I propose a further refinement: tax liabilities should be adjusted according to the degree of voter responsibility for good and bad fiscal outcomes: so a 100% Berlusconi voting record could imply a 100% increase in the differential tax burden for deficit reduction, whilst a 100% Prodi/centre-left record could imply a 50% discount.

This is merely an extension of the notions of liability which already apply to other activities with the potential for negative externalities. And it is also consistent with the notion of encouraging a stricter correspondence of duties and rights in democratic societies, as advocated by Maurizio Viroli here. It won't solve Italy's problems, because the people I would target already evade much of their tax liability - just getting them to comply with the law would be a start. But the fact that the burden of deficit reduction in most countries is falling on those who did least to create the problem in the first place offends any notion of social justice I can think of.