Arnold Kling  

The Right of Exit

Keynesian Questions... CEA on "Reforming Health Care"...

Michael Gibson writes,

Is a right of exit compatible with our obligations either to community or to a territorial system of governance?

This is an excellent question, because it gets to the heart of whether competitive government is a practical libertarian approach or an oxymoron.

I argue that a right of exit is important in order to limit government power. I sometimes think that what kept the U.S. government small in the early 19th century was not so much the Constitution as the fact that people kept leaving the then-current United States for adjacent territories. The option to exit would have made it quite difficult for government to grow large and intrusive.

But is there such a thing as too much right to exit? For example, suppose that I live on a street where we all share the same snow removal service. When I see what we are going to be charged for a big storm, I opt out, so that I do not have to pay for snow removal. The street in front of my house goes unplowed, so that everyone else on the street is either blocked or has to pay more to get my part of the street plowed. Is that a good system?

I do not think that this is an insoluble problem. In the private sector, there are situations where one consumer's exit can raise average costs. The solution is some form of lock-in. For example, condominium associations lock consumers into paying dues. Cell phone companies lock you into paying for a year or more of service.

We allow private firms to implement lock-in policies, as long as they are reasonable. Similarly, I think we should allow physical or virtual communities that perform what we now think of as government functions to implement lock-in policies as long as they are reasonable. I think we would need courts and an accumulation of common law precedents to serve as the ultimate arbiter of when lock-in policies are reasonable and when they infringe on the right of exit.

Imagine that we had such a system in place today. My services for local police, fire, garbage collection, and snow removal have a lock-in arrangement that consists of me paying local property and sales taxes or going to jail. Perhaps the lock-in arrangement does not have to be that strong. Perhaps I could choose different service providers, either as an individual household or in conjunction with other households.

Call the incumbent service provider MoCo, and suppose that there are competing service providers that are specialists. I might want to keep MoCo's fire, police, and snow removal service, but instead get garbage collection from a separate trash hauler. What lock-in policies for MoCo are fair? It might be fair for them to offer discounts on garbage collection to people who already are consumers are other services. But it is not fair for them to deny a business license to the competing trash hauler.

I think that finding the balance between the right of exit and the legitimate use of lock-in policies should be done on a trial-and-error, case-by-case basis. I do not think that Mike Gibson's question has an absolute answer. However, once you start imagining competitive government, you can see that the right to exit is not as much of a threat as might appear to be the case at first.

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CATEGORIES: Political Economy

COMMENTS (3 to date)
ajb writes:

It's interesting that the US has one of the most strenuous lock in provisions for high income tax payers. Not only do Americans owe taxes on all income regardless of primary residence (unlike most other nations), but if an American with a high enough net wealth chooses to renounce citizenship, the govt can decide to continue to tax his income for years after if it is felt that citizenship was renounced purely to avoid taxes. I frankly find this policy odious, but it seems sustainable in a world where there are unique benefits to being American.

Badger writes:

Ajb, the problem that I see with this tax treatment is that it ignores the humongous transaction costs (financial and nonfinancial) related to expatriation, to start with. There's absolutely no need to impose an additional burden on what is in most cases a positive phenomenon. The increased burden only serves to keep people away from developing a closer tie to the US, or to make Americans more bitter about their nationality, as I've yet observed a few times. It's not only counterproductive as a policy, it's evidently unfair to anyone subject to it.

I believe also that it may cause some bad and not well understood unintended consequences. I personally know a few high middle class foreign permanent residents that have made clear to me that they won't ever become American nationals because of this arrogant piece of tax code. I'd say that this policy effectively reduces loyalty to the country by providing moral justification for some form of reprisal.

Chauvinists will say, with some reason, that the malcontents are free to leave. But this is the same as denying the existence of the problem: as it happens in human resources management, we normally don't succeed at keeping the best employees around by making them feel unwelcome or by trying to lock them in with shenanigans.

Robert Johnson writes:

The problem with lock-in that is administered by the government is that you can end up born into it. Also, the government has coercive powers that my cell phone provider doesn't.

In a sense, we HAVE been experimenting with "the balance between the right of exit and the legitimate use of lock-in policies" in government, and lock-in has taken the upper hand.

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