-Caveat Lector- <A HREF="http://www.ctrl.org/"> </A> -Cui Bono?- From http://www.hudson.org/American_Outlook/articles_wn00/rubenstein.htm {{<Begin>}} Books Big Brother's Best Buddy by Edwin S. Rubenstein The End of Money and the Struggle for Financial Privacy, by Richard W. Rahn. Discovery Institute Press, 1999. ($25.00) 223 pages [back to table of contents] To hear Richard Rahn tell it, government has already lost the battle. In his new book, The End of Money and the Struggle for Financial Privacy, the former chief economist of the U.S. Chamber of Commerce argues that the proliferation of high-tech, digital technology makes it increasingly difficult for government to collect taxes at high rates or impose costly regulations on businesses. Fiber-optics, encryption, and smart-card technologies make it easier than ever to transfer money from one person to another, anywhere, without leaving a paper trail. Global financial networks allow any asset whose value is recognized and guaranteed by a reputable financial institution to be bought and sold instantly. In Rahn’s scenario, such technology will inexorably end government’s power to command and control our economic lives. This has been the conventional wisdom among libertarians for quite some time now. In the coming best of all possible worlds, they argue, the state will have to adapt to the new digital economy by cutting taxes and eliminating financial regulations, allowing people to do pretty much whatever they want, lawfully. An equally plausible outcome, however, would be for bureaucrats to fight a rearguard action against the new technologies, putting Big Brother’s eyes and ears into every cyber-transaction. “If extensive monitoring occurs, it will result in a citizenry further alienated from and hostile to a government that becomes more oppressive,” Rahn warns, adding, “Such governments are doomed.” So, where is the evidence of this brave new world free of big government? For all the triumphalist libertarian rhetoric, there’s little sign that governments are losing power to technology. In most of the world’s richest countries, government spending as a percentage of Gross Domestic Product (GDP) has risen since 1980, when the explosion of electronic technology really began. In fact, contrary to the libertarian dream, there is no modern state in which government spending as a proportion of GDP has substantially declined over the past two decades. In the U.S., for example, the most wired economy of all, tax revenues today take a larger share of GDP than in any year since 1945. Even taxes on stock-market transactions—much of which is now done online—are at record levels. The persistence of high taxes reflects a world in which people are reluctant to move for purely economic reasons. In a truly “open world,” the inhabitants of high-tax countries would be moving to lower-tax ones—Americans to Hong Kong, for example. But, of course, things just don’t work that way. It is not just the trouble of having to speak a different language. Most people have a clear sense of where their roots belong, and that makes us reluctant to move into communities very different from our own. That also works the other way around—“We” do not want many of “Them” coming to live among us. Homo economicus, as economists call the coldly rational seeker of material gain, is the exception, not the rule, even in our increasingly digital world. The end-of-government crowd also argues, however, that even if people don’t move, surely their investments do. At the click of a mouse, investors can shift funds to the lowest-taxed jurisdiction or to the country with the most stable currency. Governments that fail to provide the best environment for growth will face chronic capital flight and a brain drain. The wired marketplace will punish such laggards quickly and mercilessly. That is the “model” Rahn invokes to demonstrate the alleged vulnerability of statist governments to free markets. But let’s not overhype capital mobility. Although gross capital flows are very large today, at no time in the twentieth century did we achieve net capital flows on the scale of Britain’s steady capital exports of 7 percent of GDP at the end of the last century. In important respects, then, we are simply going back to the future. In fact, the very concept of a “global” capital market, in which funds flow freely across international borders, needs closer examination. Capital markets are not seamless; they are actually highly segmented. Most domestic savings are invested at home even if more attractive rates of return are available abroad. Martin Feldstein at Harvard University has confirmed this tendency of capital to stay home. His studies show that countries with high savings rates also have high rates of domestic investment, and those that are low on one measure are low on the other. Were capital markets a seamless whole, this could not happen. High-savings countries would export their capital to low-savings countries, where the return to investment is higher. There would be no positive correlation between domestic savings and domestic investment. Rahn is correct in stating that governments are trying hard to restrict the electronic marketplace. But the impetus for such controls isn’t coming from “big government activists” as he surmises, but rather from, well, taxpayers. Consumers believe that telemarketers are violating their privacy. They worry about Internet fraud. They fear that too many unknown individuals at too many e- commerce websites know their credit-card numbers. That is why governments have successfully proffered a plethora of so-called privacy acts. Most of these laws involve creating government databases largely linked through the individual’s Social Security number, and their advocates argue that such databases will help reduce fraud—welfare fraud, tax fraud, consumer fraud, and the like. Other good intentions include locating deadbeat dads and controlling illegal immigration. The U.S. public was told, for example, that the Health Insurance Portability and Accountability Act of 1996 was designed to maintain their insurance coverage when changing jobs. Actually, the law mandates a national electronic database of personal medical information with a “unique medical identifier” assigned to each citizen. Similarly, the Bank Secrecy Act was trumpeted as a way to protect the confidentiality of our financial records, but in truth the legislation requires banks and credit-card companies to maintain records, for the federal government, of each customer’s payments and deposits. Another law gives the feds access to information about every citizen’s currency and foreign- exchange transactions. Federal databases now enable Washington to obtain an astonishingly detailed portrait of any U.S. citizen—the checks he writes, where he banks, the charities he supports, even what he says “privately” to his doctor. All this has been established in the name of efficiency and crime control. It would be nice if Rahn were right, but he isn’t. Obviously, a wired economy does not mean the end of government’s financial power. It may, in fact, be Big Brother’s best friend. Edwin S. Rubenstein ([EMAIL PROTECTED]) is Director of Research at the Hudson Institute. He has written regularly for Forbes, National Review, and many other publications, and is the author of The Right Data (1994) and From the Empire State to the Vampire State: New York in a Downward Transition (1996, co-written with Herbert London). . . 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