Government Competition Becomes Campaign Issue

By Mankiw, N Gregory | International Herald Tribune, April 16, 2012 | Go to article overview

Government Competition Becomes Campaign Issue


Mankiw, N Gregory, International Herald Tribune


Should governments of countries, town or states compete like business rivals? The answer to that question frames the liberal- conservative debate facing the United States before the presidential election.

Should governments -- of countries , states and towns -- compete like business rivals?

The question is simpler to ask than to answer. But it reflects why conservatives and liberals disagree on many big issues facing the United States.

Most everyone agrees that competition is vital to a well- functioning market economy. Since the days of Adam Smith, economists have understood that the invisible hand of the marketplace works only if producers of goods and services vie with one another. Competition keeps prices low and provides an incentive to improve and innovate.

Granted, competition is not always good for producers. I produce economics textbooks. I curse the fact that my competitors are constantly putting out new, improved editions that threaten my market share. But knowing that I have to keep up with other economists keeps me on my toes. It makes me work harder, benefiting the customers -- in this case, students. The upshot is that competition among economics textbooks makes learning the dismal science a bit less dismal.

For much the same reason, competition among governments leads to better governance. In choosing where to live, people can compare public services and taxes. They are attracted to towns that use tax dollars wisely. Competition keeps town managers alert. It prevents governments from exerting substantial monopoly power over residents. If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet.

The argument applies not only to people but also to capital. Because capital is more mobile than labor, competition among governments significantly constrains how capital is taxed. Corporations benefit from various government services, including infrastructure, the protection of property rights and the enforcement of contracts. But if taxes vastly exceed these benefits, businesses can -- and often do -- move to places offering a better mix of taxes and services.

This lesson is on the minds of policy makers today. Over the past few decades, corporate tax rates have fallen around the world. As of April 1, when Japan cut its tax rate, the United States was left with the world's highest statutory corporate tax rate. This is one reason corporate tax reform is now high on the policy agenda. President Barack Obama has proposed cutting the rate to 28 percent from its current 35 percent, while Mitt Romney, for whom I am an adviser, has proposed cutting it to 25 percent. …

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