Increasingly obvious perils of government debt have given rise to public concern, and even alarm. Though some people argue the alarm is exaggerated, there is a growing segment of the population that is thinking long and hard about the future of our country in ways we have not seen before. In this article, I discuss the principled basis for practical solutions. In particular, I argue the principle of subsidiarity should be central in our deliberations as we forge ahead.
The Oxford English Dictionary defines subsidiarity as “the principle that a central authority should have a subsidiary function, performing only those tasks which cannot be performed effectively at a more immediate or local level.” One notes the variant “subsidiary” is used in the definition, hardly the proper way to define a term, but perhaps revelatory of the difficulty we have with a principle that is often lacking in serious deliberations of public life.
Everyone wants to be happy, but human flourishing can be hindered or helped by our social and economic structures. Some such arrangements are almost essential for happiness, but our understanding of what makes people happy has been obscured, and with it our understanding of what makes for sound economic policy.
So it is worth recalling that human beings truly flourish when their rights are protected, when they are allowed to think and worship freely, and when they can claim the fruit of their labor and direct it to the good of their families and communities.
These rights and freedoms, especially ownership of property, also serve as a check on selfishness. By rightly claiming as mine what I have earned, I also accept someone’s rightful claims to property and thus put a check on unjust selfish claims. Conflicts inevitably arise, but most people flourish when the state effectively adjudicates their disagreements and supports their needs without intruding into the decisions that are properly theirs.
In this regard, all the state is tasked to do—and it is a lot— is to support the more fundamental institutions of civil society. This is what the principle of subsidiarity entails: leaving people free to do good by leaving the decisions and choices to the smallest unit able to make them. To define subsidiarity another way, it is the expression of a working democracy, in which people have freedom and responsibility for their own lives. It recognizes that people will work hard and will do good most of the time, not just for themselves but for those close to them, provided they are not prevented from doing so or incentivized to do otherwise.
The state violates subsidiarity is when it takes on complex problems that smaller units can resolve on their own. This is a crucial shift and one that generally reflects an overly pessimistic view of human nature—that people don’t know what is good for them—and an overly optimistic view of the state and its ability to plan and execute.
In no area do people expect the state to apply the principle of subsidiarity more than in the regulation of commerce through fiscal and monetary policy: what to tax, how to tax, and how much and whom to tax, and how to control money. And whereas monetary and fiscal policy are intertwined, fiscal policies that lessen the tax burden generally support the individual, the family, business, and social organizations—and are therefore more aligned with the principle of subsidiarity.
The response to the European debt crisis has been described by some leading economists at a private meeting organized by the Witherspoon Institute recently as nothing more than giving more to drink to an alcoholic. There is no plan in place to break the habit. Thankfully, we in the United States can learn from Europe’s lessons and harness a popular movement to elect legislators who will bring change. But the change we need is a principled change. Yes, the state has developed too much control over the nation’s economic life and the more fundamental institutions, as General Motors and Citigroup help illustrate. But the way to bring about meaningful change is to demand that legislators embrace the principles of good government, subsidiarity chief among them. In fiscal policy, this comes down to cutting spending and reducing taxes.
Monetary policy, however, needs to be reformed more radically because it has changed more radically. Monetary policy — the management of money by the state —changed substantially when the state took it over entirely. Initially goods were traded; coins later made commerce more practical, and their value as precious metals ensured their trustworthiness. This remained a private transaction until the state began to issue and manage money, while private money remained in circulation. Coins, however, can be melted down, their weight altered, etc., and so they became less reliable.
The state then monopolized the control of money, backed up mostly by gold, so that the total worth of the money in circulation was related to the total worth of the nation’s gold reserves. Private money was no longer allowed. When the Western nations needed to raise money—beginning with England to finance the First World War—they decoupled their currencies from gold and gave the control of the money supply to central banks. The world entered the era of “fiat money,” money whose value is not fixed by any objective standard. The state gained total control of the money supply and increased or decreased it at will.
Anyone who values the principle of subsidiarity should question a system that leaves individuals, families, and businesses subject to decisions made for them and without the participation to which they are entitled as the rightful actors of commerce. In “Venezuela’s Monetary Mayhem” (WSJ, 18-V-2010), Mary Anastasia O’Grady reminds how fiat currencies can be used by the state—in this case Venezuela—to harm the common good.
To solve this problem, Messrs. Fieler and Bell have bodly suggested (“The Gold Standard: The Case for Another Look,” WSJ, May 7, 2010), the state could do two things: return to guaranteeing the currency with physical assets priced by the market, and let private money compete with state money. This would allow the market to counter the power of the Central Bank, they argue; and while I leave the necessary details of the economics for others to elaborate, Fieler and Bell get the principles right.
Subsidiarity is not the only principle in play in economic or public life, but it is a critical one. It is deeply embedded in the American Experiment. The American Founders understood the flaws of the human condition and worked out practical arrangements to avoid the concentration of power in one person or institution. As for its impact in other countries, the principled and unilateral cessation of the fiat dollar would significantly diminish the dominance of the United States in world affairs. Currently the United States is able to borrow money at lower real rates of interest than the developing world, giving it a considerable economic advantage.
America ought to lead the world to money backed up by assets priced by the market, and approve the use of private money to compete with state money. Under these conditions fiscal and monetary policy—with its successes and failures—would more properly reflect the state role of serving the needs of the other pillars of society. It would also send the right signal to the rest of the world: that America does not seek to adversely influence those economies by the unilateral and self-serving effects that a fiat currency has on less developed countries. And this is the kind of behavior that moves individuals to act more honorably in commerce here and abroad: A fitting goal for the XXI Century.
Luis Tellez is president the Witherspoon Institute and founding director of the American Principles Project.