Personal Thoughts on Societal Priorities

I recently had an interesting discussion with a diverse group of people about the value of the Space Program announced by Obama Administration earlier this month. Of course, the issue has generated debate in regards to the role of government in the modern society. Here are my thoughts on the subject.

History has proven that free-market environments provide more effective conditions for sustained economic growth. Many refer to the progress of the western societies, and primarily USA, to support this argument. However, since the globalization movement intensified – during the last two decades – the rapid evolution of the emerging economies, even in absence of perfect free market mechanisms, (China being the most relevant example) raise questions in regards to the absolute relevancy of the above hypothesis.

A closer look at how the role of the government is played in prosperous societies will offer an interesting perspective.

Constitutions provide the framework for the fundamental rights and obligations that members of a nation must collectively observe. They purposely leave the role of defining and running the economic space into the hands of elected governments. For most democratic countries this works fine, within the confines of the national borders. But what about the global environment?

There is no constitution universally accepted at the planetary level, nor there is any governing authority generally recognized across the globe. The creation - after the Second World War - of international organizations such as UN (United Nations) was meant to ensure the harmony in the political space. Similarly, portions of the economic spectrum were intended to be regulated by structures like WTO (World Trade Organization) or IMF (International Monetary Fund). We all witness, today, how difficult it is for members of these organizations to reach consensus on any measure of real importance, and how ineffective their involvement is in configuring a healthy and controllable global economic environment.

The consequence is a series of gaps, overlaps, contradictions and confusions - all anomalies that are creating a moral hazard - selfishly exploited by business and political entities in possession of the asymmetric information. This is why banks and other financial institutions prosper in this environment, beyond our wildest imagination. This is their business model: to detect valuation differentials and capitalize on any inbalance of sorts by creating exchange markets where these transactions take place, allowing them to benefit in two ways – charging significant transactional fees, or shorting the movement of stocks.

It is hard enough to regulate an internal system; it is close to impossible to impose such regulations on the global scale. Hence, the legitimate question of the worthiness of the type of markets that do not create a social utility, nor respond to a planetary need.

The speculative financial markets should be contained. The current betting system that constitutes the market for derivatives resembles rather a casino setting. It should be a sport in which people engage individually or as a group, but only to the extent of their sole capabilities. It should be treated and tolerated as entertainment, rather than means of existence. To allow such industry to evolve to the point that its failure could destabilize an entire economy it’s not only perverse, but is totally irresponsible.

                             *        *         *        *         *

We all agree that societies are complicated structures, which require a complex mechanism of organization and control. Beside industries that are producing real value through the conception, creation and transformation of goods and services there is an objective need for support and infrastructure, where the majority of peripheral services play an important role. But they have to remain peripheral as opposed to taking the center stage, and substitute the core.

Among the type of government spendings that do not have an immediate pay-back in terms of societal benefits – other than the employment of people in the industry - one could include the space program, production of military equipment or field deployments etc. These are few areas where efforts are of a strategic nature and will only bring long-term benefits. Although the outcomes are positive and generally supported by members of society, the efforts required to achieve meaningful results transcend the ability of the private sector. Incentives have to be created and support provided by governments through subsidies or budgetary allocations. Therefore, budget allowances remain the most effective tools to trigger, stimulate, accelerate or terminate such efforts.

At the other end of the spectrum there are activities that have a natural tendency to proliferate, due to the attractive margins they offer when insufficiently regulated (see financial speculations, drugs and arms dealings, adult entertainment etc.) We all can understand that in a free-society the existence of such activities is a necessary evil (the Romans invented the concept of “bread and circus” as the effective means of keeping people occupied in order to prevent revolts). But they should not be tolerated to the point that they become the most effective way of getting rich.

Ability to accumulate wealth should be correlated directly with the value contribution to the society. And this evaluation – of what is congruent with a nation’s values and aspirations – should be entrusted to a democratically elected government. In fact, the government should create and maintain (sometimes by means of political decisions, and other times by means of public consultation) a classification of activities, organized based on a merit point system, from the least important (but legal) to the most important.

The activities at the left of the spectrum (the least important) should be taxed more aggressively to prevent out of control expansion, the ones in the middle should be tolerated or encouraged through reduced taxes and/or subsidies, while the ones of national importance should benefit of tax exemption and budgetary funding.

It is in this context that I believe that trading derivatives for financial speculation should be placed at the left of the social utility spectrum. I find the whole discussion about bailing out institutions using such techniques for their own benefit as unfounded. When they do well they should be taxed in the highest bracket; when they are on the verge of collapse they should be left to suffer the consequences of their own greed.

On the contrary, the space program should be funded in proportion to the nation’s ability to support it, without sacrificing the normal quality of life of its citizens. In the long run, the cognitive progress and the technological advancements resulting from such programs provide universal benefits that, beyond any doubt, enhance the human condition, thus justifying the investment.