If, on the other hand, nations compete over goods that are moreefficiently produced at the global level, then competition can beharmful. For example, if states do not agree universally to foregothe use of ozone-destroying chlorofluorocarbons, then the reductionin demand by the "virtuous" states may drive the price of CFCsdown, increasing demand in states that ignore the ban. Progress atthe global level may well require global cooperation.

There is another factor that must be considered. Provision ofgovernment at the local level requires taxation. In an isolatednation, with no factor mobility, it is easy for the government totax labor, capital or both. When these factors can move freelybetween countries, then the power to tax is undermined andsometimes eliminated. Today, capital is highly mobile betweencountries, and this has set off a raging tax competition. Thebiggest mover in this contest has been Ireland, which beganlowering its corporate tax rate from 50 percent in the late 1980sto the current rate of 12.5 percent and has experienced remarkableand persistent economic growth, as tax-dodging capital from aroundthe world flowed across its borders. Subsequently, many othernations (most recently Greece) have sought to copy the Irishexample. Clearly, as my colleague Eric Engen and I noted in arecent article in Tax Notes, the world may be headed for anequilibrium with a zero capital tax.

However, tax competition need not erase the ability to taxaltogether. First, countries can always tax immobile factors suchas land. Second, mobile individuals might voluntarily exposethemselves to taxation if valuable government services are bundledwith it. Indeed, individuals are likely more sensitive to thequality of public goods (parks, schools, clean air) than iscapital. Accordingly, taxes on labor will not necessarily beeliminated by global tax competition, even as the homogenization ofcultures, language and low cost of travel makes migration morecommon. If a country offers a good mix of public goods and taxes,laborers will choose to work there, just as many Americansvoluntarily move to high-tax suburbs. If it does not, they willmove to a country that does.

The one big exception to this rule is clearly redistributive taxpolicy. While wealthy individuals may have a higher demand forgenerous public services (witness the quality of public schools inrich suburban communities), they may often be unwilling toacquiesce to redistributive taxes that are high relative to theother benefits offered by government. Even the most social-justiceloving of millionaires will be tempted to move when the personaltax costs of existing government policies are higher than theperceived benefits.

Oppressive regulation may also lead countries to seek theprotection of a cartel, but the philosophical attachment of leadersto inefficient regulatory schemes could well be weaker than theirattachment to redistribution. The one exception to this may beregulations that in effect redistribute wealth, such as extravagantlabor laws or agricultural subsidies. If one bundles these into thecategory of redistribution, then it seems safe to say that cartelsformed by the world's governments to prevent competition willlikely do so to protect redistribution.

Germany and France, for example, have social welfare states thatput a heavy burden on all of their revenue raising devices. Taxcompetition from countries like Ireland reduces their ability torely on capital taxes, making their spending plans difficult tofinance. The problem is not that paupers move to these countries.Rather, it is that those with the financial wherewithal to financethe democratic socialists' objectives are moving away, literallyand figuratively. Similarly, heavy labor-market regulation has madeunemployment high throughout most of Europe and has led to higheremigration. This impact of policy on mobility is becoming visiblein the data, a sign that competition may be heating up in manyareas. And multinationals are not the only mobile players in thegame. If one plots net migration patterns in OECD countries againstthe Heritage Foundation's index of economic freedom, for example,one can see a clear and statistically significant tendency forindividuals to move toward countries with more freedom.

In response to these and other factors, Germany and France haveattempted to force fellow members in the EU to harmonize tax andregulatory policy in their direction. So far they have failed ontaxes. The benefits to deviating from the harmonized policy, asIreland has demonstrated, are too rich to ignore. But manyregulations have successfully been harmonized by the EU, and passedon to new members as well, despite the fact that the rigiditiesassociated with EU regulations are likely harmful to economicgrowth. Central European countries such as Poland clearlydetermined that harmonization across the broad range of governmentpolicies required by the EU was a cost worth paying, given the manybenefits of membership. And the ability to force some harmonizationhas clearly removed some of the pressure for change in Germany andFrance.

This pattern of bundling positive benefits of internationalcooperation with cartel-driven barriers to internationalcompetition is the most troublesome development in worldgovernance. Indeed, one recent study co-written by Alesina was ableto "confirm that the extent and the intensity of policymaking bythe EU have increased sharply over the last 30 years . . . . Inrecent years the areas that have expanded most are quite remotefrom the EEC's original mission . . . ." But it is likely that muchof the morass that is EU regulation would have a difficult timewithstanding the competition between nations if the EU were unableto tether its regulations to other attractions of membership, suchas free trade, that have large pecuniary benefits associated withthem.

Sovereignty & World Government

There are two main motivations for government cartels. The firstis the desire to achieve some global public good, such asprotecting the ozone layer from CFCs, and the second is toeliminate competition that especially undermines incomeredistribution. From the perspective of the United States, thechallenge of global government is to focus on the provision ofnecessary public goods, but not to create powerful agencies thatcan, like the EU, turn into effective international cartels thatundermine beneficial competition between nations. Until the UnitedStates decides that necessary social welfare objectives are beingthreatened by competition between states, it should only be willingto form very narrow policy cartels with very little real authorityover members.

When an issue emerges that requires action at a global level,our nation should not seek to address that issue with an existingagency. To the extent that the global action is valuable, foldingit into the purview of, say, the United Nations will only increasethe leverage that the agency will have in the future to imposeharmful policy coordination. Rather, the United States should takeadvantage of the fact that since it is such a large country, it caneffectively create new cartels with just a few partners. The UnitedStates should adopt the rule that any new international objectiveto require policy coordination between nations should necessitatethe creation of a new agency with a charter that limits itsactivities to that specific issue.

An opponent of this policy might argue that such limitedorganizations may be unable to discipline their members withouthaving available "clubs" such as trade sanctions. But just as aclean park can improve a community, global public goods significantenough to motivate coordination should be desirable enough on theirown that they encourage nations to participate in their provision.Should rogue states misbehave, individual nations can always decideto punish defectors. Existing international bodies have, to say theleast, a spotty record of success in this area, and thecompetition-defeating risks associated with granting these bodiessovereignty over the actions of civilized nations seem far higherthan any benefits that might emerge from their strict discipline ofrogue nations.

What issues might require increased world government? There aremany public goods and externalities that cannot adequately bemanaged at the national level. Global warming is clearly onepossibility (if the science becomes decisive), as is the use ofCFCs, the protection of patents, halting the spread of communicablediseases and perhaps the elimination of terrorism. Each of thesemay require more international cooperation, but if so, it will bebecause the global objective in that area is worthy in and ofitself, and a stand-alone body that does not empower harmfulgovernment cartels would be adequate for the task.

An international body with a wide agenda and authority willinevitably be a tempting takeover target for countries with welfareand regulatory states that are so large that they could not prosperunder global competition. The best defense against such an outcomeis to spread the global authority as thinly as possible. Absentrational design in our global government, we may stumble into aworld that poorly provides valuable international public goodsbecause the global agencies pursue both worthy and questionableobjectives. As the world becomes smaller, the promise ofcompetition rises, as does the threat of government cartels.

Essay Types: Essay