Financial Policy In SPACE!

Okay, this is something you pretty much have to be me to find interesting, hence the cut…

(Also, in the event that any poor unfortunate person does happen to read this … this is an amateur analysis. I am not an economist, and do not claim to be.)

…but here goes anyway.

A common trope in science fiction is very, very big governments. It’s not at all unusual to find novels or TV series or game settings where all the worlds are united under one government. Except, and here’s the rub, this is damn weird. It’s never happened in the real world, and arguably may not. Part of this is technology, of course. A genuine global authority needs to be able to react reasonably fast to threats if it’s to stay in power everywhere. Prior to the age of cell phones and transcontinental passenger flights, fast response was something you could only really do locally. (The British Empire gave it a good go, largely by decentralising administrative responsibility onto loyal local elites in the colonies. Even then, I suspect it might be significant that a lot of the growth coincided with the advent of the railways and the telegraph, and the really big screw-ups – i.e. America – happened beforehand.)

Anyway, the point I’m making is that world government is hard enough when you have only one world to worry about. SF settings frequently postulate rather bigger societies, sometimes by many orders of magnitude. To take one of the epochal works, Asimov’s Foundation series postulates a politically-unified galaxy with twenty-five million settled planets with an average population of four billion apiece. This was done deliberately, so that the number of living human beings would approach the number of molecules in an ideal gas. Seldon’s psychohistory was based on an analogy to the statistical laws that govern ideal gases. They tell you nothing useful about individual particles, but are highly accurate for the aggregate.

Governing such a vast society is going to be difficult. It must pose a whole new set of economic challenges.

One thing that has recently started bugging me about such societies is, what about government borrowing? In the real world, a substantial part of many industrial countries’ revenues actually comes from loans raised from lendors. A key measure of a country’s perceived economic health is the terms that it’s able to borrow money on. Generally, if investors think you’re a reasonably safe risk, you pay a lower interest rate. (The lender makes less profit per year, but they know they’re secure in eventually getting their money back.) If you’re a war-wracked, poverty-filled, AIDS-epidemiced hellhole, you’ll probably get a rather higher rate (if you have enough of a functioning financial system to be borrowing at all).

In fact, borrowing can be a significant source of income. If I remember the figures correctly (which I may not – please correct me if I’m wrong!), last year here in the UK, the Government’s spending commitments were £149bn greater than the money it brought in through taxes. The rest was made up through borrowing. Although on the face of it spending more than you earn seems a rather dodgy idea, in principle it can work. As long as long-term economic growth outperforms interest rates, your country has nothing to worry about.

(Of course, in the event of the fiscal house of cards coming down, like it did recently, then all of this changes…)

But let’s go back to our hypothetical Galactic Government(TM). What does this mean for public finances?

Well, I suspect borrowing is going to be rather different, to say the least. In fact, I wonder if it will even exist as a policy option. You see, here in the real world, with many competing states and many competing financial institutions, there’s a lot of choice around. If a state behaves stupidly, say by promulgating a constitution that declaims its debt or whatever, the finance industry goes somewhere else. Just as equally, if a financier behaves badly then the states have plenty of other options.

But if you have one single state, controlling all of space, then this isn’t really a possibility. There isn’t ‘anywhere else’.

Let’s run a little thought experiment. Suppose you run a major bank, in the year 25,000 AD. The Federation of a Million Worlds has suddenly hit upon bad times. Suppose the AIs are revolting or the aliens have woken up or whatever … whatever the cause, suddenly the government’s gone nasty. The Extremist Nutcase Nasty Party has either won the election or staged a coup or been the last man standing after the assasins’ shoot-out. Needless to say, the Nutcasists have no commitment to civil liberties. But they do have a huge military bill that needs paying. They want cash, and they probably aren’t interested in your property rights. You can lend them money, sure, but the likelihood of the Nutcasist administration repaying you so much as a bent ha’penny is probably about zero.

So, when the Government Inspector visits your office, what are you going to do? Are you going to invite him to jack into your payments system … or are you going to look miserable and hang-dogged and pretend that the bank vaults are empty? Realistically in this case, if you’re a suitably-creative banker, you’ll be putting on your sad face. (No-one said the Nutcasists had to be particularly intelligent…)

In a slightly less silly case, consider the predicament of lots of banks, all faced with only one customer (The Government). Weirdly enough here, the Galactic State becomes the ultimate monopsony. Or, to phrase it another way, it’s a buyer’s market. Oddly enough, this may not actually be as good for the taxpayers as it sounds. The State will presumably buy from whoever offers the most for the least – and everyone else will have no market and go to the wall. Then suddenly the State has no choice whom it buys from.

In either of these cases, one thing seems clear. Borrowing will be a far less useful policy option – if it is one at all! (Hmm, puts Foundation in a different light, doesn’t it? Hari Seldon must have come along at about the same time the Exchequer on Trantor was starting to handle like a dying car…)

But this will have pretty major consequences. For starters, presumably, the government has to try to deliver a balanced budget. Money in = money out. In principle, running everything through taxation receipts sounds great – except that it might not be in practise. Taxation isn’t infinitely flexible. Vary it too much too fast and wages and prices can’t keep up. And then you have fuel for a popular revolt. If the people refuse to pony up, then you don’t pass go and you absolutely don’t get your £200. (Monopoly FTW!)

So we have a Galactic State with a very inflexible annual budget. Hmmm. This raises the question, what do they do when the inevitable recession arrives? I mean, deficit spending isn’t an option. They could possibly resort to printing money in an attempt to do a Keynesian expansion, I suppose. However doing that really badly also risks an inflationary crisis. Mucking around with the currency during a period of economic uncertainty might not play too well with the nervous public. Stagflation isn’t much fun either.

So, in fact, I suspect that they may end up having to do nothing. Just it there, like a sack of potatoes, and hope for the best. Only that probably isn’t going to work too well either. So where does this leave us? A permanently depressed Galactic economy? A tightly-controlled society obsessed with central planning in the desperate hope of avoiding the next recession? A society that tries to convince itself that this is good and natural and it’s actually healthy for the government to stay out of the regulating business, despite all the evidence to the contrary? (Herbet Hoover in Spaaace. Yuck.)

Where does this leave us? I’m not entirely sure. Thoughts, anyone?

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