Friday, November 08, 2013

Centralism and decentralism

Under democratic communism, like most nation-states, there are three general levels of government: national, regional (state/province), and local (city/county) government. The allocation of "purely" political legislation is a topic for another post; I want to discuss economic centralization and decentralization here.

There are certain things in an economy that must be centralized, most notably the creation and destruction of the national currency. Hence, the national government must assume this role. However, the actual allocation of capital to firms is best decentralized. Thus, the national government will create new money as it sees fit (subject to certain requirements noted below), and then give it to regional and local governments on an absolute per-capita basis, to allocate to firms as they see fit. Regional and local government then pay the government rent on that capital, which is then "destroyed" by the national government. The national government can impose income and wealth taxes on individuals if it wishes to destroy more money to manage inflation.

The national government must create new money, if necessary for the following purposes. First, they must always fund their operations. (In contrast to our recent contretemps, no one can "shut down" the democratic communist government.) Second, they must always pay interest on any money they choose to borrow. Third, they must always make social insurance (retirement, medical care, unemployment insurance, etc.) payments. Finally, they must always pay workers who come to government for work, even if those workers are employed by a regional or local government.

In contrast to the national government, regional governments are budget constrained: they can spend only what they collect in rent, taxes, borrowing, and allocation from the national government. They therefore have an incentive to allocate capital to more productive (rent-creating) or socially desirable (taxation-justifying) endeavors. Because they are budget constrained, they have to be able to go bankrupt; the national government, therefore, has to set government bankruptcy law.

Note that regional governments do not operate firms; they merely allocate capital to those firms. Any endeavors they actually manage directly have to be funded by taxes and fees, not rent on capital.

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