Latvian Elections will lead to Premature Minarchisation

Whoever wins the Latvian elections will face the unavoidable issue of drastically cutting the government budget and basically taking a great leap toward the perhaps unintended end result of the international lending program of reducing Latvia to one of Europe's first minarchies.

A minarchy is a state which has the absolute minimum of government, basically just police, some kind of state dispute arbitration or court system, and a minimal, volunteer defense force. All other services that we expect from government today are delivered in a minarchy by the private sector, as a business, a cooperative non-profit enterprise, or as charity.

If Latvia makes the budget cuts of around another LVL 900 million over the next two years, it is hard to imagine it as anything but an improvised and unplanned leap into minarchy. There will be further reductions of government salaries and staffing, leading to further claims for unemployment and to emigration by state employees pre-empting their inevitable dismissal.

To use a Latvian expression -- like "amen" in church" -- we will see whatever new government is put together after October 3 (the elections are on October 3) sooner or later announcing drastic cuts in spending for education, health care and pensions. Education and health will be pay as you go, probably with no tax deductions, and pensions, if all else fails, will simply be cut to just around subsistence minimum with the retirement age quickly raised to 65 or 67.

A true minarchy is a generational project requiring a gradual reduction of entitlements from government, shifting these to non-state institutions (pension and health insurance companies, cooperatives, charities). This, in turn, presumes that society becomes prosperous, that the wealth and value consumed by taxation and the state can put to other purposes, and that the society generates steady economic growth and increased innovation.

In Latvia, there are virtually no signs of the kind of economic recovery that could create the basis for any kind of prosperity in the foreseeable future (before the 2020s). Latvia's export statistics simply show that this country is chopping more trees (the forestry sector) and exporting more foodstuffs.  The high tech, high value-added part of the export pie is miniscule.

The terms of the International Monetary Fund (IMF) and European Union loans to Latvia preclude any kind of economic stimulus, and efforts to spend EU matching funds have been slow, ineffective, and hampered by spending cuts that prevent the government from matching even existing EU funds on offer.
Larger economies, such as the US (not an EU member) have been spending at a "devil may care" rate (or as Latvians would say " uz velna paraušanu"), with mixed results. Latvia may feel a slight indirect effect of larger nation stimulus and/or recovery in an increased demand for lumber and, of course, labor.

There has been, to be sure, crazy talk of ditching the entire lending program or re-writing it, which ignores the fact that Latvia's budget deficit cannot be covered by lending on any better financial terms (interest rates) than the IMF and EU package. No bank, no buyer of government securities is likely to give better financial terms.  But that does not solve the problem of a stagnant economy and emigrating skilled labor force that Latvia faces for the next five years, at least.  Nor does it restore, to my mind, the irreparably broken trust in political institutions.

Here, one could say, at least some Latvians are ready, ideologically, to accept a minarchy, since the government/state has done nothing and will do nothing for them, has broken promises and withdrawn entitlements (not all of which were wisely granted) and will break more promises and take away almost all tax-financed entitlements in the near future.

That, naturally, poses the question of how to deal with such issues as education, health care, even public safety (as police forces lose their best and brightest, of which there were not many to begin with). The easiest way out is to go where these services exist as a reasonable "return on taxation"  and where the salaries from which taxes are taken are much higher than in Latvia. In other words, emigrate, and as Europe recovers, tens of thousands will do so.

Those remaining will probably tolerate a gray economy approach. If paying taxes gives no tangible return and "pays" for vanishing entitlements, then pay in cash in envelopes, especially if you know that your workers, who are not drunks or spendthrifts, will use the cash wisely -- to support their elderly grandparents, to educate (for pay) a child, to pay a doctor for good health care.

Since the gray economy is technically illegal, there will be little opportunity to create formal structures such as education cooperatives (funded by "envelope earnings) or health cooperatives, never mind hiring private police. Seeing cash diverted for economically rational reasons (getting something rather than nothing for one's money) to such informal, grey economy structures will bring down what remains of the State Revenue Service and other repressive structure, who will be increasingly blunt, dumb and brutal in their activities (having lost any educated, sophisticated staff to Ireland or elsewhere). The same people who hound mushroom and berry picking old ladies for LVL 30 monthly licences in lieu of tax, will hound the teacher who advertises " will teach for cash."

The end result of processes in Latvia set in motion by the credit boom of the mid-2000s will be that, after all the budget cuts are made, will will have a "minarchy of poverty", more or less the Third World kind of minimal government where a poor, poorly educated population keeps a primitive, subsistence economy cranking along, unable to generate a wealth surplus sufficient to either capitalize the innovation and entrepreneurship needed to lift the economy out of stagnation, nor to fund a state that can provide some of the tools (education, health care, security) for being able to do so.

Are there crypto-minarchists at the World Bank?

I didn’t know there were crypo-minarchists in the recent World Bank mission to Latvia and I am still not sure if  I am being unfair in saying so.  However, their latest recommendations (leaked to the LETA news agency, where I work) seem to point in that direction.

First, my definition of a minarchy is government that has three functions -- defense, police and the courts (to the extent that these functions cannot be otherwise privatized). In a minarchy,  there is very low government spending and extremely low taxation.  Market forces (buying and selling) and social cooperation (voluntary pooling or allocation of resources) dispose of most of the gross domestic product of such a society.

I have written before that the drastic government spending cuts imposed on Latvia by international lenders are pushing the country headlong toward a kind of twisted and rushed minarchy. Some of the World Bank proposals seem in line with this.

What worries me the most is are the proposals to drastically reduce so-called budget-financed studies at Latvian universities and, essentially, make most students (and their parents) pay tuition. In the long term, this may be a viable solution, but not together with the massive unemployment and drastic salary cuts that Latvia is experiencing and will continue to experience over the next (my estimate) three to five years. With plummeting living standards, there will simply be a drop in the number of those who can afford higher education and, for some, the lack of opportunity, combined with existing doubts about the quality of Latvian higher education, will be a powerful argument for student-aged people, if not whole families, to emigrate.

Reducing the capacity of a nation to educate its population amounts to a form of external futuricide -- the killing of the future.  The futuricidal aspects of the World Bank recommendations read as follows:

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-- Reduce the number of budget-financed places by 50% in all higher education institutions (including the institutions under ministries other than the MOES--Ministry of Education and Science).

or

-- Reduce the level of budget financing for each student place by 50%, and make up the difference with 50% co-payments by students in budget-financed places. 

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There certainly will be some savings, but the end result, at the end of the decade, will be a dumber, somewhat youth-depopulated Latvia.

Like all of the defacto head-over-heels rush to minarchy plans imposed and proposed by the international lender, none says a word about how any of this will lead to economic recovery in Latvia. Instead, all this points to an increasing reduction of domestic purchasing power (ensuring continued stagnation) and reduced capacity to export (emigration of skilled labor and reduction of future skills needed for export industries and new enterprises).  At the same time, what I could call returnless taxes will stay steady or increase as income cuts, emigration, and economically logical tax avoidance and evasion degrade the tax base.

In making private investments, we all look to a return on investment and get out when the return diminishes. We are forced to pay taxes and should at least think about the options when the return (public services, health care, education, pensions) starts to deteriorate. In Latvia, the deterioration is already severe and will get worse with no credible end in site. This is not to say that the World Bank’s suggestions that public services (reducing unnecessary hospital beds, etc.) aren’t reasonable. However, bureaucracy and inefficiency are endemic in Latvian public administration and I don’t give much credibility to predictions that this will change. I just spoke to a woman whose daughter turned 18 (which “pops up” in the electronic Register of Inhabitants) and should be taken off the list of dependents at the State Revenue Service (which checks with the Register of Inhabitants to avoid taxing the dead and emigrated), but she was asked to bring a physical notice of her daughter’s legal maturity from one state agency to the other.  Maybe the Latvian state administration can be fiscally bashed into changing, but the side effects could be worse than the symptoms.

Latvia still faces budget cuts of around LVL 1 billion (about USD 2 billion ) over the next two years (and that may not be the end of it). The country’s government hallucinates that it will be able to adopt the euro in 2014 (try 2020 instead, if the PIGS won’t have torn the single currency to tatters by then). Not a santim of those LVL 1 billion in savings will go back into the economy, there will be no tax cuts, few new businesses will form, another 100 000 or more will emigrate as the rest of Europe recovers. Higher education will be unaffordable, with all that implies (the World Bank also wants student loans tightened and reduced).

Worse yet, it is too late for an alternative scenario of letting the Latvian currency float and carefully printing enough of it so that domestic wages and purchasing power at local prices are not savaged. That is water under the bridge...

There may be a path to making Latvia or any other country into a prosperous minarchy, but it will take years, if not decades of slow tax cuts and reduction of government, strong economic growth, and a society educated enough to govern itself largely through voluntary, cooperative institutions. The World Bank’s proposals are a form of pernicious, destructive crypto-minarchism.

Bumbling toward minarchy in Latvia

I have always been interested in libertarian politics and consider myself a libertarian on most issues -- decriminalizing drugs, legalizing gay marriage, striking victimless crimes from the law books, abolishing compulsory military service, etc. Broadly speaking, libertarians are divided into two camps -- minarchists, who favor a small, night watchman government, and anarchists, who prefer to let society self-organize without a state.

Without going into that debate, an interesting observation on the topic of this blog is that with the massive, rushed and hectic budget cuts that Latvia is undertaking, the country is, in fact, bumbling and stumbling in the worst possible scenario toward becoming a minarchy. When the LVL 1.5 billion are cut from the government budget over the three years 2009-2011, and when the real effect of the formal cuts on tax revenues (and tax evasion) take hold, it is likely that Latvia will be able to finance little more than a skeleton police force, a small professional military and some kind of court and criminal justice system. At least on paper.

The problem is that states, especially states with bloated bureaucracies and massive inefficiency in public administration such as Latvia, have created dependencies and reliance by the population that is very painful to cut and betray in the kind of series of short and desperate actions that the Latvian government is taking.

Employers have been compelled to pay social taxes on behalf of employees, among other things, for their pensions, and these pensions (some have argued, with considerable merit, that they are the vested private property of pensioners) are now being confiscated, all expectation of any benefit from the compulsory diversion of income has been shattered.

If Latvia were seriously moving toward minarchy, an essential step would be to cut social taxes and leave employees with more income to divert to private pension insurance schemes. Younger employees could have the option of spending some of their income to support sick or elderly parents or grandparents.

Since the government is, essentially, gutting the state health care system, it should also cut taxes to allow individuals to buy private health insurance and do nothing that would inhibit the rapid formation of private hospitals and other medical care facilities, where private insurers would pay most of the bills.

Education is another area that has been bulldozed by the government, making teaching the lowest legally paid "profession" in the country, assuming that one cannot be paid below the (reduced) minimum wage in the public sector. However, no steps have been taken to encourage the creation of private and cooperative schools and of "informal" education.

By late summer, it will become clear that the schools in Latvia will not open on September 1 (there may be a "stay-away" strike on the first day) and will be seriously depleted of teaching staff if they do open. So the issue of alternative, non-state education will be acute by fall. Creative solutions may have to be found, such as, perhaps, gathering pupils at library internet access points for instruction by internet video (rural children could be charged a small fee to watch lessons at private schools in Riga).

The police will also be severely affected by the cuts, with the result that the ability of the police to prevent and investigate crime will deteriorate, bribe-taking will increase and the police force will continue to lose its best and brightest to emigration and private sector work.

Little has been done to create an alternative system of private law enforcement by expanding the role of private security companies (perhaps allowing certain areas of the country to invite tenders for private law enforcement coverage).

In short, Latvia has unwittingly started on the path to minarchy, but has nothing resembling a transition plan, nor any substantial analysis of how this can be done. Indeed, the government is still projecting the illusion, to the public, that its current path of budget cutting will somehow lead to a system that still provides state-funded pensions, health care, education and law enforcement when, in fact it is (unintentionally) reducing these government entitlements and services to a completely inadequate and disfunctional level. The Latvian population will, over the next 18 months, be forced into the worst kind of minarchy. It remains to be seen if civil society can somehow improvise around this process.