Reforming Global Finance

Ten Steps to Run the Economy as if the Future Matters

What policies should governments focus on to ensure that future generations live at least well as the current generation?

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Takeaways


  • Ensuring people have the education they need to earn, participate in policy debates, and develop strong shared values is the central task of government.
  • There needs to be a counterweight to the short-term political pressures inevitably reflected by government decisions.
  • The problem with the international economic institutions is not just an insufficiently long time horizon, but also their profound lack of legitimacy.
  • The world cannot afford to let things ride on the environment, just because no sensible global agreement has been arrived at.
  • Future generations should have the capacity to be at least as well off as we have been and to leave the same legacy for successive generations.

With so many problems to tackle, we have to start somewhere. The key to all of these suggestions for where to start is the idea that future generations should have the capacity to be at least as well off as we have been, and should be able to leave the same legacy for successive generations too.

1. Launch a true “Measuring Progress” exercise

Undertake extensive public consultation about what indicators the government should use to supplement GDP statistics. Commit to annual publication of the selected indicators and a high-profile occasion on which the government will comment on the results, such as the presentation of the government’s annual budget.

2. Truthful accounting

Ensure that official statistical agencies have the resources and make the commitment to developing and publishing statistics on intergenerational accounts. Otherwise, the true extent of the real government debt burden will not be known.

This also requires developing new statistics on intangible value, household activities and time use in order to measure the contributions to economic activity that are not reflected in conventional statistics because they take place outside the market or are just hard to count.

3. Increased savings

Introduce policy measures to encourage increased savings by individuals. One important kind of measure would encourage saving directly.

The details of how these measures might work will be specific to each country, but they could range from “opt out” schemes for retirement saving and additional tax incentives for long-term savings to the encouragement of cultural change. To have a long-term, real-life effect, it would be optimal to include the importance of saving in school’s citizenship/economics curriculum.

A related measure is to discourage spending, via taxes on consumption (and specifically high-carbon consumption).

Many countries have preferred to tax income because it is easier to make this a progressive system, taxing the well-off relatively more heavily. However, income tax systems have become complex with many distinctions and loopholes.

A consumption tax approach could be much simpler, with some scope for progressivity. It could also readily be used to discourage high-carbon products and services.

This is very controversial, especially in the Untied States. However, it is worth remembering that it always used to be commentators on the right who favored a consumption tax, due to concerns about overconsumption.

4. Focus on businesses investing in the economy

Ensure that tax systems not only encourage businesses to invest, but also do so over a longer time period. Currently, much of this is driven by short-term thinking, often extending over a time horizon no longer than the two-year payback period that astonishingly characterizes much current business planning.

The practical details will differ in different countries. But one example is the tax treatment of dividends versus debt will affect companies’ financial time horizon. Similarly, ending the favorable tax treatment of acquisitions rather than organic growth would encourage genuine investment for the future.

5. The virtue of public service

Make the old-fashioned virtue of public service a priority in implementing the inevitable cuts in public expenditures that are forthcoming in the aftermath of the financial crisis. The process of cutting spending on services is bound to be painful, as the early experience of Greece shows, and it is bound to be affected by compromises and deals.

Still, it’s essential that electorates have a sense that reforms are driven by more than financial necessity — and that there are important principles and values involved as well.

6. Deal with income inequality

Governments should address the extremes of income inequality. There needs to be a three-pronged attack. The first line of attack is the use of the moral scope for governments to influence behavior and norms through public comment.

The second line of attack is using the tax system and the law to drive out the excessive use of bonuses. For example, the tax law might state that bonuses should not exceed base salaries.

The third line of attack is tackling legal and regulatory structures that give some professions market power allowing them to charge high fees and salaries, such as undue restrictions on entry into professions such as law and banking.

These steps should come on top of the government’s normal use of the tax and welfare system to support society’s poorest and most vulnerable members.

7. Engage citizens more directly

We need experiments in leveraging the use of the Internet to engage citizens more directly in public policy. Even if relatively few people take part, these activists — provided they speak and act from a position of knowledge and drive toward a common solution — can make a very positive difference.

Methods such as deliberative consultations on important decisions might prove an effective way of improving transparency and legitimacy in decision-making. They also offer a defense of policy decisions against lobbying and legal gaming.

Some political scientists are skeptical about the role online engagement can play in political processes, especially given some evidence that it can polarize opinion rather than achieving greater consensus.

But even if these skeptics were right about its direct impact, the Internet will indirectly affect the important role of the media in democracy and the provision of information to citizens.

8. Look beyond short-term political pressures

There needs to be a counterweight to the short-term political pressures inevitably reflected by government decisions. Governments, in fact, have an explicit duty to take account of the long term and future generations.

For example, one idea that emerged from the two opposition parties in the United Kingdom’s 2010 general election, and was implemented by them in the coalition government, is a body responsible for long-term fiscal stability. The new body, the Office for Budget Responsibility, is required to comment on the impact of aging on the government’s tax and spending plans.

Some countries will already have some existing institutions whose role is to act as guardians of posterity. However, all countries need to pay more careful attention to their institutional framework.

9. Reshaping the international economic institutions

The international economic institutions clearly need reform. Their problem is not just an insufficiently long time horizon, but ultimately also their profound lack of legitimacy. From the European Commission through the proliferation of UN agencies (such as the IPCC) to the IMF and WTO, they are remote from voters. Sometimes, they are remote even from member governments.

The required reforms will be varied, but the common themes should be the clear embrace of a public service mission, openness and greater direct engagement with the members of the public whose lives these institutions ultimately affect with their actions and recommendations.

10. Don’t fudge on climate change

Absent international agreement, each country is called upon to pursue its own policies to address the risk and likely degree of climate change. That is a function of the overriding interest in self-preservation that every nation has.

The world cannot afford to let things ride on the environment, just because no sensible global agreement has been arrived at. Neither can individual nations.

Different populations will make different assessments, but it is vital to recognize that, given the scientific uncertainties and moral judgments, there is no “right” answer as to what policies to introduce. This is properly a matter for democratic debate, and the debate therefore has to occur at the national level.

There is no international agency with the credibility to tell national governments what they should do. But even without international consensus, any individual country can introduce a measure such as a carbon tax, to nurture new technologies and clean energy investment.

What will our legacy be?

The success of any of these ten steps — whether they are measures to reduce income inequality, to get citizens more engaged in policy deliberations, or to persuade a nation to develop a long time horizon — depends on education.

Ensuring people have the education they need to earn, participate in policy debates, and develop strong shared values is the central task of governments in running the economy as if the future matters.

These challenges, viewed in their sum total, may seem daunting. We would do well to remember that two centuries ago, in the early stages of the Industrial Revolution, and again just over a century ago in the high Victorian era, our forebears faced similarly profound, complex and seemingly overwhelming challenges.

Such was the restless dynamism of capitalism and the upheaval caused by new technologies. The challenges we in the West now face are different in nature and character, but not in gravity and complexity to the ones that our forebears had to contend with.

As to our own legacy, we should remember — and appreciate — that even today we still rely on some of the investments they made in response to the challenges of their times, and on the institutions they created.

To look at some of the masterpieces of late-19th- and early 20th-century architecture or engineering, for example, is to be awed by the confidence those responsible were expressing in the future. We should take courage from the commitment they made to provide for the long term.

Less visible, but no less important are the political, legal and social institutions which they bequeathed their successor generations. Think of the endowment of libraries and museums, the high school movement, the birth of mutual insurance and pensions companies — just a few of the many examples of business enterprise serving a social purpose.

What is our legacy going to be?

Editor’s note: This article is adapted from The Economics of Enough: How to Run the Economy as If the Future Matters (Princeton) by Diane Coyle. Published by arrangement with the author. Copyright © 2011 by Diane Coyle.

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About Diane Coyle

Diane Coyle is Professor of Economics at the University of Manchester.

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