Does the State Have Real Power to Intervene in the Economy Today?

The latest Journal of Labour Economics (Uni of Chicago Press) features an essay entitled “The Detaxation of Overtime Hours: Lessons from the French Experiment.” The data does show an increase in the number of overtime hours claimed, which was the intention of the law. However data gathered about the number of hours worked (the particular focus is on trans-border workers, who should theoretically come to work less overtime than French workers after October 2007) shows that:

“The detaxation of overtime hours has had no significant effect on length of time worked.”

The law did nothing to change earlier laws or regulations concerning the working week (which was capped prior to 2007). It simply changed the cost of working overtime. And as such, according to the authors (Pierre Cahuc and Stephane Carcillo), despite the popularity of this same policy in other European countries (e.g. Austria, Belgium, Italy and Luxembourg), its result is simply to aid tax optimisation.

French 35 Hr Working WeekWithin the context of the French socio-economy this article and argument may strike you as being one among many overtly, and obviously political manoeuvres in what is today a highly divided society between the left and right wings of politics. However, there is a wider point at play, and a more international one. In an increasingly globalised world (and by globalised I actually refer to devolution as well as internationalisation), how much power do state politicians truly have over the economy (it’s a big enough topic already so please stick to economics if you comment)? And if such powers are different in extent to how they were in the past, then what is the shape of that trend? Are we on a plateau today? Or will the future see politicians at the state level become completely redundant?

According to a growing consensus, the result of modern globalisation has been a dominance of the markets and capitalists over the power of democracy and state governance. But in many ways this consensus is a shame, because it means that few people discuss the extent of government power anymore; they only discuss whether it is good or bad that it has declined, and will continue to do so. Furthermore, there is evidence to suggest that globalisation is not always the prime culprit behind such reduced power.

In the above example Cahuc and Carcillo do not argue that exempting overtime income from tax is ineffective because the global markets have a more powerful impact on the amount of overtime demanded or supplied. They argue that it is ineffective because it ignores some of the most fundamental principles of fiscal planning. If taxation is to be efficient then it must define a tax base that the authorities can easily verify, and checking the amount of overtime actually worked, as opposed to how much is declared, is almost impossible for the Tax Authorities and/or withholding agent, to accurately verify. Indeed, although they do not mention it in the article, one could go to the very roots of the subject. In ‘Wealth of Nations’ Adam Smith proposed four canons (principles) by which tax can be assessed: efficiency, fairness, certainty and convenience. It could be argued that exempting overtime income fails all four of these.

  1. Efficiency has been discussed already. It requires an easily identifiable tax base.
  2. On the matter of fairness, some have less verifiable hours than others, and often these people tend to be richer to start off with.
  3. The criteria of certainty is all about simplicity. The more complex the tax system becomes, and the less that the general public know about which parts of their income are taxed in which way, the less certain everything becomes.
  4. Convenience is about how easy it is to find out what’s owed, and how easy it is to collect the money. As already discussed, overtime hours hours not recorded but actually worked, is incredibly difficult to actually check.

Failures in these four areas suggest that rather than globalisation, it may often be sheer incompetence on the government’s side which causes an ineffectiveness of economic intervention. Clearly this is a subjective view, and it’s not necessarily one that I am advancing. However remember that the term ‘globalisation’ was barely even discussed before the late eighties. And yet the ability of governments to manage, plan and/or regulate their economies has been limited since well before.

Policy Area How did it Affect Economic Governance?
The Rise of Monetarism & Fall of Keynesianism Since the late seventies Keynesian macro-management has been largely discredited, Monetary Policy has taken precedence over Fiscal Policy, and Monetary Policy decision making has been outsourced to independent Central Banks.
Tax Resistance The ‘race to the bottom’, in which governments compete to attract rich residents with low rates of tax, is not the only reason for tax resistance. Think about the Boston Tea Party – what started the American Revolution was essentially tax resistance. And what about Hoover’s tax cuts in 1929? He cut marginal tax rates to the lowest point in modern history, a long time before modern globalisation.
Privatisation Speaking historically, privatisation was less about increased efficiency, and more about simple costs. Looking at examples like British Steel, privatisation occurred prior to globalisation, and was implemented as a way of getting rid of subsidies from the Exchequer.
Moves to Restrict Social Provisions and Benefits These also started prior to the modern period of globalisation. Extensive taxation, designed to redistribute wealth from poor to rich, was rejected by electorates around the world, particularly, and probably firstly, in the US.

According to Robert Skidelsky, an academic often referred to as today’s most prominent biographer of John Maynard Keynes:

“Globalisation is as much a consequence, as a cause of declining government power.”

Such a statement starts one thinking about the Japanese fiscal stimulation of the 90s, and those employed by many Economic Intervention Antisince the 08-09 financial crisis. It brings to mind the rise of China. And it also brings to mind left wing leaders from Latin America like Hugo Chavez and Evo Morales. In 2005 the BBC reported that out of 350 million people in Economic Intervention ProLatin America, 3 out of 4 lived in countries with left leaning Presidents. It’s become so significant a trend in Latin America that it has been given a name – “the pink tide”. And despite what many have said about their success, there have been successes.

So, does the state have real power to intervene in the economy in the modern, globalised world of today?

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