Centralization and the Fiscal Cliff


The Gray Lady weighs in today on the so-called “fiscal cliff,” correctly pointing out that even if a deal is reached, like the one on the “debt ceiling crisis” before it, it will hardly begin to correct our disastrous economic course. The problem, Mr. Taleb avers, is centralization  of our banking and political system.

First, in a decentralized system, errors are by nature smaller. Switzerland is one of the world’s wealthiest and most stable countries. It is also highly decentralized — with 26 cantons that are self-governing and make most of their own budgetary decisions. The absence of a central monopoly on taxation makes them compete for tax and bureaucratic efficiency. And if the Jura canton goes bankrupt, it will not destabilize the entire Swiss economy.

In decentralized systems, problems can be solved early and when they are small; stakeholders are also generally more willing to pay to solve local challenges (like fixing a bridge), which often affect them in a direct way. And when there are terrible failures in economic management — a bankrupt county, a state ill-prepared for its pension obligations — these do not necessarily bring the national economy to its knees. In fact, states and municipalities will learn from the mistakes of others, ultimately making the economy stronger.

It’s a myth that centralization and size bring “efficiency.” Centralized states are deficit-prone precisely because they tend to be gamed by lobbyists and large corporations, which increase their size in order to get the protection of bailouts. No large company should ever be bailed out; it creates a moral hazard.

It is, as the article hints, a myth that centralization will provide for greater social and economic equality, despite the claims of Progressive types that the power will be used redistributively. Income is more maldistributed now than it was on the eve of revolution, not even considering the social and political advantages of yeomanry. Income inequality tends to result from government policies rather than be corrected by them, and the more centralized such policy-making the more likely that those with the greatest economic means can bend things to their will.

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