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The American Future
Exploring Ideas to Shape our Nation
Spring 2010‘ ‘
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Views expressed in The American Future are those of contributing authors and do
not necessarily represent the views of The American Future.‘

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The American Future  ‘00‘
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The American Future provides a forum for consideration of critical
issues in American political, economic, and philosophical thought,
and explores in a peer-reviewed arena the possibilities for
improving the future of the United States.

In this context, an immediate objective of the Journal is to provide a
multidisciplinary vehicle for disseminating diverse but highly
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medium. Editorial policy will be guided by selecting papers from a
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The Journal will initially have a multidisciplinary orientation, and
we expect that interdisciplinary sections will expand over time.
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learning process involved, and to the uncertainty of the
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(ommittee to continue to evolve as well.

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In his later work, Jacques Derrida often spoke of a politics of

hospitality, justice over law, an ethical concern for the other, and of a

Dzdemocracy to come.dz Indeed, the thread running throughout Derridaǯs

entire corpus is a welcoming of Ž ,and it could be said that his oft-

quoted and misunderstood Ž  

 could be defined as Dza way of

making room for the other, and so fundamentally a kind of hospitality and

welcomedz (Smith 15).1 And as he stated himself, Dz[D]econstruction

justice,dz and also, Dzethics hospitalitydz (Smith 65).2

But such value on hospitality begs the question: What is

hospitality? This term is often used haphazardly and without

contemplation. Oftentimes, we say someone is hospitable if they put on

extravagant parties, make good food for large groups, or if they regularly

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1
Smith, James K.A. Jacques Derrida: Live Theory. New York: Continuum, 2005.
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Originally stated in: Derrida, Jacques. µ³Force of Law´: The Mystical Foundation of Authority,¶ 15; and
Derrida, Jacques. On Cosmopolitanism and Forgivenessm 17.
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open up their home for events with family and friends. A deeper, more

philosophical, more politically relevant, understanding of this term is

necessary.

In this paper, I intend to articulate the etymological meaning of

Dzhospitalitydz so far as it relates to Derridaǯs work of deconstruction and

concern for justice. I will then turn my regard to the current state of the

American psyche, where xenophobia reigns, as witnessed in the rhetoric

regarding our war on terrorism, immigration policy, and most recently in

Barack Obamaǯs campaign for President. In conclusion, in this context, I

will consider how unconditional hospitality might possibly be utilized in

the political sphere. These issues, and especially hospitalityǯs role in the

political sphere, are particularly pertinent in light of our current economic

crisis, as economic woes are more likely to increase fear of the other and

heighten the sense of protectionism already at large in American culture.

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I begin with the etymological nuances of the word Dzhospitality.dz Then, I

will explain how Derrida makes use of the term, and finally, I will draw

parallels with Derrida and the most unlikely of figures, Jesus.

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The English word, Dzhospitality,dz comes directly from the Latin,

  

or     
. The Greek word in the Bible translated as

hospitality is   , literally Dzthe love of strangersdzȄor perhaps more

accurately, Dzstrange love,dz which connotes the fact that many perceive

offering kindness to a stranger as extremelystrange!

This nuance is carried over into the Latin word   which can

mean either Dzhospitabledz but also Dzstrange, foreign.dz This double-meaning

is better understood by tracing the wordǯs history.   is a combination

of two Latin words: 
and 
. 
,from which we derive the word

Dzhost,dz which, typically describes one that welcomes and entertains

visitors or guests, originally meant Dzstranger.dz It then took on the

connotation of Dzenemy,dz Dzsince any stranger in early times was a possible

enemydz (Wheelock 121).3 Hence, our words Dzhostiledz and Dzhostility.dz From

meaning Dzenemy,dz 
went on to mean Dzarmy,dz as so well represented

in the classic King James Version which speaks of the DzLord of 
dz (1

Sam 1:11; 2 Sam 6:18; 2 Kings 19:31, etc.). Finally, 
took on the

meaning as we understand it today, meaning Dzguestdz or Dzhost.dz

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Wheelock, Frederic M. Wheelock¶s Latin Sixth Edition. New York: Harper Collins, 2005.
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, means Dzhaving power over, lord of.dz From 
we get our

words Dzpotent,dz and Dzpotency.dz A Dz  ital,dz then, is a place that 

the sick Ž has the power both (conceivably) to heal them Ž authority

to tell them when to leave. As host of a party, I am the lord of the house in

which the guests have gathered and have the authority to let them know

when the party is over.

Inviting friends over to oneǯs house, then, is not    but

more akin to  Ž (Dzbrotherly lovedz), or fraternity, or perhaps even

cronyism at times. For when we invite our friends over, we expect

reciprocity. If I have a friend over at my place, I expect him to do the same.

But hospitality is supposed to be a giftȄand gifts are freely given, no

strings attached.

 ŽŽ  


Derrida was very critical of fraternity because of its reciprocal

nature. He was quite dissatisfied with the notion of tolerance as well,

because tolerance retains the power structures of host and guest.

Tolerance, to Derrida, is Dza supplementary mark of sovereignty, the good

face of sovereignty which says to the other from its elevated position, I am

letting you beǥ I am leaving you a place in my home, but do not forget that

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this is my home ǥ If I think I am being hospitable because I am tolerant, it

is because I wish to limit my welcomeǥand maintain control over the

limits of my Ǯhome,ǯ my sovereigntydz (Borradori 127-28).4 Under the guise

of tolerance, an attitude of assimilation still reigns, in which a Dzthreshold of

tolerancedz is developed that draws up acceptable limits of hospitality in

order to retain sameness and sovereignty. In other words, we Dzoffer

hospitality only on the condition that the other follow our rules, our way of

life, even our language, our culture, our political system, and so onǥa

hospitalityǥ with certain conditionsdz (128).

In contrast, Derrida called for a democracy that involves

unconditional hospitality. This hospitality involves a radical, risk-taking

welcoming of the strangerȄa nation without borders, that welcomes the

immigrant rather than drawing lines of superiority and inferiority based

on nationality. DzPuredz hospitality is Dzopen to someone who is neither

expected nor invited, to whomever arrives as an absolutely foreign % 
,

as a new  %,ǥwholly otherdz (Borradori 129).Our understanding of

nations, or of a particular community, ought to involve a hospitality that

does not merely open itself to guests, but to strangers, (illegal)

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Borradori, Giovanni. Philosophy in a Time of Terror: Dialogues with Jurgen Habermas and Jacques
Derrida. Chicago: University of Chicago Press, 200.
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immigrants, and asylum seekers, and allows the stranger to remain

different from us rather than be assimilated.

Thus, it should be observed that a certain paradox is at play in the

term Dzhospitality.dz For when I welcome someone into my home, I am

situating myself as the powerbroker, the owner of the house, the one who

is the master and sovereign of the place. She is a visitor to my abode, a

guest in my possession. In other words, the notion of hospitality is

supposed to be one of welcoming and of an appreciation of the Other, but

it is simultaneously annulled by the power structure at work that keeps

the guest at armǯs length, fearfully works to protect the possessions of the

owner, and even expects a certain level of reciprocity or assimilation by

the visitor. As John (aputo summarizes, DzThere is an essential Ǯself-

limitationǯ built right into the idea of hospitality, which preserves the

distance between oneǯs own and the strangerǥ So there is always a little


ility in all 
ing and hospitalitydz ((aputo 110).5

In this sense, Dzpuredz hospitality is an Dzimpossibility.dz (aputo

continues:

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5
Caputo, John D. Deconstruction in a Nutshell. New York: Fordham University Press, 1997.
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[H]ow can I graciously welcome the other while still retaining my
sovereignty, my master of the house? ǥ Hospitality really starts to
happen when I push against this limit, this threshold, this
paralysis, inviting hospitality to cross its own threshold and limit,
its own self-limitation, to become a gift ÷ Ž   

ǥ That
requires that the host must, in a moment of madness, tear up the
understanding between him and the guest, act with Dzexcess,dz make
an absolute gift of his property, which is of course impossible.
(111)

Hospitality really gets going when the lines between host and

guest become blurred, when my welcoming of the other involves a level of


ity towards my  power and sovereignty. Unconditional

hospitality is a recognition of my own self being 
age to an infinite

responsibility for the other. Hospitality is the very Dzcondition for the

possibility for ethicsdz (Smith 70). Here, Derridaǯs dependence on Levinas is

evidenced. To be, for Levinas, is always being-for-the-other, having my

own existence called into question, and always infinitely welcoming the

Other. To be a subject, is to be a Dzhost,dz to be Dzhostagedz (Levinas1 299).6

A closely related word, Dzcommunity,dz might bring some clarity to

Derrida thoughts. In Latin,    means both Dzmutual participationdz

and also Dzto fortify on all sides, to secure.dz In other words, inherent in this
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d
Levinas, Emmanuel. Totality and Infinity, Trans. Alphonso Lingis. Pittsburgh: Duquesne University Press,
19d9. See also Levinas.Otherwise Than Being or Beyond Essencem Trans. Alphonso Lingis. Pittsburgh:
Duquesne University Press, 1998, p. 112. Derrida references these phrases in his essay, ³Adieu to Emmanuel
Levinas.´
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word is a sense of protecting, of using   tions. Thus, when we speak of

Dzcommunitydz we are often saying, Dz(ome and join us, ÷ 
you have to

become just like us if you want to and weǯre committed to keeping out

everyone who is different from us.dz Likewise, in Latin   means

Dzcommon, united, or universal.dz Inherent in this word is a connotation of

assimilation, as represented by the fact that when people say, DzWe need to

be united,dz they really mean, DzWe all need to agree and believe the exact

same thing.dz

So then, if a radical spirit of community were  icatedȄa

welcoming of the Other with full appreciation of their othernessȄcertain

nuances of the word Dzcommunitydz must be eliminated. A Dzcommunity

without communitydz is necessaryȄa conceptualization of the notion of

community without the linguistic implication of essential sameness, of

fortifying and securing, as well as the us/them notion that is inherent

within the word.

 Ž  


Interestingly enough, Derrida, who said he could Dzrightly pass for

an atheistdz could have found support for his positions from Jesus. Jesus

was once invited to a party by a wealthy religious ruler. At the party, he

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looked at the host and said, DzWhen you give a dinner or a banquet, do not

invite your friends or your brothers or your relatives or rich neighbors,

lest they also invite you in return and you be repaid. But when you give a

feast, invite the poor, the crippled, the lame, the blind, and you will be

blessed, because they cannot repay youdz (Luke 14:12-14). Jesus and

Derrida agree: Hospitality is not about reciprocity but is an invitation to

those who would never expect to be invited, a radical welcoming to those

who have no home to welcome you, and a reckless giving of your

possessions to those who have none.

(onsider again that Dz  italitydz is tied to the word Dz  ital.dz In

another gospel account of Jesusǯ life, we are told that the religious leaders

were upset with Jesus for spending time with Dzsinners and asked his

disciples, DzWhy does your teacher eat with tax collectors and sinners?dz But

when he heard it, he said, DzThose who are well have no need of a physician,

but those who are sickdz (Matt. 9:10-12). The  itality of the  ital is

not for the rich and wealthy that need  itality but the needy. It is the

foreigner that needs a host and the homeless that needs a place to stay.

And when we love the stranger, Scripture tells us, it may well be

we are unknowingly offering our home to an angel (Heb. 13:2) or perhaps
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even to Jesus himself (Matt. 25:31-40)! God does not afford us the

certainty to distinguish when we are serving man or God, nor does he offer

this option. For any man who does not love the stranger, orphan, and

widow is clueless about the definition of religion (James 1:27). There is no

distinguishing between the holy and secular, the divine and material, the

glorious and the mundane. Or, to put it in the philosophical language of

Emmanuel Levinas, oneǯs encounter with God only occurs through the

enactment of my ethical responsibility for the Other. God is approached

only Dzby way of the detour of the other persondz (Purcell 62).7 When you

see the face of the stranger, you see a trace of the face of God (Levinas2

123, 147).8

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(onsequently, however, we are not a nation of people who know how to

practice   , despite how much we claim to give to non-profit

organizations or to foreign aid. Instead, we have opted for a culture of 

phobia instead. Fear drives the installation of security systems,

fenced-in homes, and our ever-increasingly private lives. Fear is what sells

our newspapers, drives our political policies, and often ultimately
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7
Purcell, Michael. Levinas and Theology. Cambridge: Cambridge University Press, 200d.
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Levinas, Emmanuel. Otherwise than Being or Beyond Essence. Pittsburgh: Duquesne University Press,
1998.
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influences our vote. Rather than a culture of welcoming the stranger, we

have witnessed a cultivation of fear.

Insidious in our thinking is a belief that anything foreign is

dangerous and ought to be feared. As a result, much of the inflammatory

rhetoric in the public square is aimed at spreading distrust and a complete

dismissal of the other rather than willingness for open dialogue. Such

rhetoric can be clearly seen in the speech revolving around terrorism and

American foreign policy with the Middle East, the issue of immigration and

undocumented immigrants in the United States, and most recently in the

2008 presidential campaign. A common view pervades our culture, for

instance, that all Muslims support terrorism, and that the Middle East is in

desperate need of American democracy. Such views have led to the

mistreatment of Muslim and Arab-native people in our country, and in the

blacklisting and deportation of some of them. It can be observed in the

way Dzbeing Arabdz has become a kind of racial slur in our society. And this 

÷ is evidenced in the up-to-date tally of U.S. military deaths in

Iraq and Afghanistan while there is virtually no report of the possibly 1.3

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million Iraqis who have died since the American occupation in 2003 and

millions of others who have fled from their homes.9

 ÷ can be seen in the way many people have responded to

the problem of undocumented workers, particularly in those who are

convinced Dzthose MexicansdzȄas if every one of them is from MexicoȄare

going to steal our jobs and force us to all learn Spanish, and that the only

proper response is to round them up and ship them home. (onvinced that

to be Dzall-Americandz is to be White and English-speaking, there exists a

large portion of our population who are wary of the foreign tongues and

faces of immigrants. This white supremacist thinking is exhibited in the

comments of Pat Buchanan, for instance, who said that the diverse

immigration population that is eradicating a white majority in the U.S. will

bring about a DzThird World America.dz Such convictions have not only led

to the subhuman treatment of undocumented workers but have also made

it more difficult for refugees, individuals seeking asylum, and immigrants

to obtain U.S. citizenship.

This culture of  ÷  seems no more vivid in our imagination

currently than in how it has been portrayed in the finally over 2008
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For Derrida¶s thoughts on Islam, see Cherif, Mustapha. Islam & the West: A Conversation with Jacques
Derrida. University of Chicago: Chicago, 2008.
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presidential campaign. Numerous Republicans utilized countless fear

tactics to try to deter people from voting for our new President, Barack

Obama. They chanted his middle name DzHusseindz in order to incite distrust

and fear into Americans. They fabricated lies that Obama is a MuslimȄ

which, again, would having a Muslim as President really be such a bad

thing? In fact, Rush Limbaugh went so far as to say that Obama was not

American but was an Arab (codeword for DzMuslim,dz which is then a

codeword for Dzterroristdz) and came from an Arab part of Africa. His

comment not only encourages the breeding of a culture of fear, but it is

simply not trueȄKenya (even though Obama is not Dzfromdz Kenya) is in

sub-Saharan Africa, where, ironically enough, the national language is

English and 90% of its population identify themselves as (hristian.

Obama has been said to Dzpal around with terrorists,dz has been

called a socialist, a Marxist, and a communistȄas if all of these terms were

synonymous and were somehow evil in themselves. He has been called

unpatriotic and un-American (i.e., not White), and even the anti-(hrist.

This billowing racist neo-Mc(arthyism is expounded with the view in mind

that Obama, because of his blackness, is somehow not one of us, is

mysterious and strangeȄis the enemyȄand we ought to do everything to

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shore up our defenses against those who may take away what we hold to

be DzAmerican.dz Indeed, one article which noted the many hate crimes

which occurred after Obama won the electionȄfrom campaign signs

vandalized to schoolchildren chanting DzAssassinate ObamadzȄcited how

there is Dza large subset of white peopleǥwho feel that they are losing

everything they know, that the country their forefathers built has

somehow been stolen from themdz because of the results of this election.

One man went so far as to say, DzIf you had real change it would involve all

the members of (Obama's) church being deporteddz (Washington).10

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What then can be said about the state of our nation and its need for

hospitality? Derrida himself made it extremely clear he did not think it

possible to legislate unconditional hospitality. Nations, governments, &

communities have multiple ethical obligations constantly interfering with

and overriding each other. Nations are just as equally obligated to create

asylums for the stranger, the orphan, and the widow as they are to protect

against the threat of terrorism, for example. In other words, Derrida
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These quotations were taken from Washington, Jesse. ³Obama election spurs race crimes around country,´
ª   . Nov. 1d, 2008. Accessed from http://www.usatoday.com/news/nation/2008-11-15-
29d000088_x.htm.
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writes, DzHospitality is doomed to be conditional and limitedȄand

therefore % 
dz (Smith 70).

But even if unconditional hospitality cannot be legislatedȄwhich

is undesirable in many waysȄit nonetheless is the very thought which

allows us to think of the idea of alterity and is, therefore, Dzthe condition of

the politicaldz (Borradori 129). In other words, all of our limited kinds of

hospitality, no matter how fractured or discriminating they are, can only

be conceptualized in light of unconditional hospitality. As Derrida states,

DzIf we want to understand what hospitality means, we have to think of

unconditional hospitality, that is, openness to whomever, to any

newcomerdz (Derrida, (aputo, & Kearney 304).11

Furthermore, unconditional hospitality is like a specter haunting

us from the future, reminding us that we have yet to arrive at Dzrealdz

democracy, that democracy is always Dzto come.dz Unconditional hospitality,

then, haunts us as a healthy reminder that, for Derrida, the Dz(essential)

opposition between the unconditional ideal and the conditions of reality,

does not issue in either complacency or despair; rather, [it] finds in this

disparity a call and a challenge: to make laws more hospitabledz (Smith 70).
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Derrida, Jacques, John Caputo, & Richard Kearney. ³Desire of God: An Exchange.´ After God: Richard
Kearney and the Religious Turn in Continental Philosophy. New York: Fordham University Press, 200d.
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It is an ideal that should permeate our life and political practice in such a

way that it breaks forth as justice through the cracks of the law.

What then are some ways in which unconditional hospitality can

challenge our laws and stretch our current thresholds of hospitality? A

formidable response to the complex matter of the proliferate racism in

America would require far more than this paper can offer, but it is safe to

say that such acts and attitudes should be roundly condemned. And the

notion that there exists an essential, unified DzAmerican identitydz that ought

to be preservedȄwhether that consists of being White, (hristian, English-

speaking, pro-war, or pro-capitalistȄought to be seriously questioned.

At the very least, the work of unconditional hospitality in the

political sphere begins by recognizing that laws can be unjust. Laws are

often subjectively created and motivated by prejudices or ill will or by the

personal, economical, and political interests of those who make them.

Unjust laws abound in our nationǯs history including the establishment of

slavery, the three-fifths compromise, and the laws that prevented African-

Americans from voting until 1965, all which led to the treatment of Blacks

as subhuman. Even laws developed out of good intentions can have

disastrous side-effects and must be reconsidered.
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Here is where unconditional hospitality can begin to do its work.

Take, for instance, the process of naturalization our country currently

adopts. Individuals must participate in a process that takes almost three

years and involves tests on speaking English and American historyȄ

which most Americans could not even pass if it were a requirement. We

should be calling these laws into question, asking if itǯs just to make

refugees and immigrants wait for three years to experience the benefits of

U.S. citizenship, asking if speaking EnglishȄwhich, consequently is  
a

monolithic language in this countryȄshould be a necessary requirement,

and asking if knowing the number of Supreme (ourt justices there are or

the number of amendments in the (onstitution is really essential to being

an American.

To say it otherwise, perhaps our laws on immigration should more

properly reflect the unconditional hospitality described in the famous

words emblazoned at the base of the Statue of Liberty from the poem DzThe

New (olossusdz by Emma Lazarus:

Mother of Exiles. From her beacon-hand

Glows world-wide welcome ǥ

Give me your tired, your poor,

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Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tossed, to meǥ

(learly this picture of unconditional hospitality which sits at the seat of

our symbol of democracy is a vision of that we have yet to achieve. We

have forgotten too quickly that we all were once immigrants to this land.

In the same way, we must question our current laws on

undocumented workers. Some will reply, DzThese immigrants have broken

the law! They ought to be deported and sent back where they belong!dz But

unconditional hospitality asks: Dz(ould it be that it is not the people that

need changing but the law itself?dz We must recognize, for instance, that

those who come to America without documentation do so not in an effort

to break laws but to escape a politically harsh regime or pursue economic

opportunityȄboth which lie at the heart of the so-called DzAmerican

Dream.dz Thus, any response must not resort to treating these individuals

inhumanely, but rather, ought to recognize not only their humanity but

their evident contribution to our society. Those cities which have officially

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taken on a Dzsanctuary citydz status12 have been motivated by these facts and

the reality that many of their businesses would cease to function without

the aid of undocumented workers.13

This is just the beginning of a long conversation that needs to be

had in our nation. The need to talk about issues of hospitality,

immigration, and our political relation to the other (i.e., foreign policy)

ought not become less significant during a time of economic decline. The

troubles on Wall Street must not allow us to forget who we are as a nation,

forget that these issues are the proper implications of the founding

principles of American democracy, which announces that people are

created equal and extends Dzliberty and justice .dz

Perhaps, with the election of a new President, a President for unity

in the midst of true diversity and respect for difference, such a

conversation can be entertained. Perhaps, such a dialogue can occur with a

President who believes that the Dzimprobable experimentdz called

democracy is still a long way from being perfected, that America is still in
‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘
12
Derrida advocated for something quite similar. ³In 199d, Derrida delivered an important address to the
International Parliament of Writers²an organization that seeks to be an advocate for writers who are
considered dissidents by their home nations and thus silenced. The Charter of the IPW focuses on creating a
network of µCities of Asylum¶²drawing on the biblical notion of µcities of refuge¶ (Num. 5:9-2)²where
writers could escape oppressive regimes and be welcomed into democratic spaces that would give them
voice´ (Smith d8-d9).

Cf. Faiola, Anthony. ³Looking the Other Way on Immigrants.´ M  
 . April 10, 2007, A01.
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pursuit of Dza more perfect uniondz (Obama).14 For, as Derrida notes, DzTo

exist in a democracy is to agree to challenge, to be challenged, to challenge

the status quo, which is called democratic, in the name of a democracy to

comedz ((herif 42). But of these things, we can only wait and see. 

‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘
!"
‘# ‘$  
‘%‘ ‘  
‘& '‘   ‘‘ 
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‘
‘‘
#   ‘‘$   ‘‘%   ‘ ‘  ‘
C &‘‘   ‘ ‘   ‘
‘
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3‘%+ ‘

Governor Schwarzeneggerǯs attempts to close (aliforniaǯs historic

budget deficit, which the Legislative Analyst Office recently pegged at $40

billion by the end of fiscal year 2009-10, 1 have thus far consistently met

with failure. Amongst his proposals is an expansion of the sales tax based

to include services. The Federation of Tax Administrators reports that

(alifornia currently taxes 23 services;2 the Governorǯs plan would increase

that number to approximately 29 services including appliance and

furniture repair, vehicle repair, golf, veterinarian services, and admission

to amusement parks and sporting events.
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1
Legislative Analyst Office. ³2009-10 Budget Analysis Series: Overview of the Governor¶s Budget´.
Sacramento, LAO: 2009. Retrieved January 2, 2009 from <http://lao.ca.gov/2009/budget_overview/09-
10_budget_ov.aspx>.

2
Federation of Tax Administrators. ³By the Numbers´. July 2008. Retrieved December 0, 2008 from
<http://www.taxadmin.org/fta/pub/services/btn/0708.html>.

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(alifornia is not the first state to pursue this type of sales tax

reform, and it most certainly will not be the last. In some cases states have

been successful in integrating an expanded tax base with established

political and consumer habits; other states have not been as successful.

New Mexico and South Dakota are instances of the former whereas Florida

and Michigan are instances of the latter. Determining if the Governorǯs

pursuit will end in failure or success is obviously a matter of debate to

which I aim to contribute.

More often than not, sales tax base expansion is justified and

enacted on economic grounds, yet the expansion has consistently failed

multiple times in multiple states for political, administrative, and

taxpayer-driven reasons. This suggests that the opportunity cost of

expansion is fluid. The state of affairs in the pre-tax climate where

legislatures openly advocate taxing services suggests a low opportunity

cost, but many times states repeal the tax rather quickly after enactment,

which suggests a realization that the cost is much greater than initially

estimated. This also seems to intimate that those states that repealed their

tax on service prior to the effective date, such as Michigan in 2007, are

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rather fortunate to not have endured this potentially destabilizing

ambivalence.

The goal of this paper is to highlight some of the more pressing

(alifornia related political, administrative, and taxpayer-driven reasons

that can eventually overshadow economic incentives advocated by a tax

on services. To meet this end, I provide a brief background on the

problems facing (aliforniaǯs revenue stream in the following section.

Section 3 offers a brief history of (aliforniaǯs attempts to tax services while

Section 4 details the economic incentives for doing so. Sections 5 and 6

present the political and administrative consequences of taxing services in

(alifornia. The paper closes in Section 6 with a review and thoughts on

further research.

3‘ "+

Since the introduction of the sales and use tax in 1933, the revenue

has shared the burden of buttressing (aliforniaǯs general fund jointly with

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income tax. However, in recent decades sales and use tax receipts have

continuously declined. This has led policymakers to embrace the income

tax as the primary revenue source for the general fund. In fiscal year 1989-

90 the income tax constituted 45.4%; nine years later in fiscal year 1998-

99 it constituted 52.7%.3 Sales and use tax revenue for these years was

37.4% and 35.8%, respectively. The current state budget indicates that

fiscal year 2006-07 income tax composed 55% -- roughly $51 billion --

while sales and use tax composed 29%. This trend is problematic because

$14 billion of the $51 billion was generated from taxes levied on stock

options and capital gains in (see Figure 2); in 2002-03 these taxes only

accounted for $5.2 billion. Thus, the fiscal health of (alifornia and its

economy is at the mercy of the ebb and flow of the market.

The over-dependence on income tax revenue is a recurring

problem. Figure 24 shows the rise in collected income tax during the dot-

com market boom. The subsequent market contraction in 2001

constituted a significant cut in the general fund instigated by a precipitous
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
Fitz, Joe. ³Economic Perspective: Summary of Recent Economic Developments.´ July 2000. Retrieved
September 19, 2008 from <http://www.boe.ca.gov/news/pdf/ep7-00.pdf>.

Ã
Center for Continuing Study of the California Economy. ³Is California A High Tax State?´ October 2007.
Retrieved September 17, 2009 from <http://www.ccsce.com/pdf/Numbers-oct07-HighTaxState.pdf>.

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decline in income tax revenue. Not unlike the current deficit, budget

forecasts

É  
   
   
  


 



   



 




˜ ˜

˜˜ ˜







˜        
 ˜ 
       
 ˜  

  

 
Ž 
  
 

assumed the stream of revenue from income would continue and was not

until  
the market slowed that spending was eventually cut.5 The

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5
Legislative Analyst Office. ³The 2002-0 Budget Bill: Perspectives and Issues´. Sacramento: LAO, 2002.
Retrieved September 22, 2009 from <http://www.lao.ca.gov/analysis_2002/2002_pandi/pi_part_1_an
l02.html>.
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combination of events resulted in a $12.5 billion deficit for the 2002-03

budget.

In order to help stabilize and offset the volatile nature of the stateǯs

revenue stream, (aliforniaǯs politicians and pundits have advocated

various types of tax reform including closing income tax loopholes,

abolishing inefficient corporate tax incentives, and reevaluating property

tax administration.6 Arguably, however, tax reform discussions tend to

focus less on property, income, and excise taxes and more on the sales and

use tax, and at least one observer provides an extremely convincing

insight as to why this is the case. Republican Board of Equalization

member Michelle Steel notes that any tax increase requires two-thirds of

the legislature approval, and in the absence of a super majority of tax-

friendly Democrats, such a condition would also require a number of tax-

wary Republicans to offer their support. 7 However, the Board of

Equalization has the vested power to interpret law and create regulations

for what is taxable and what is not taxable. Therefore, she notes, the Board
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d
California Tax Reform Association. ³Recommendations on Tax Policy´. January 200. Retrieved January
15, 2009 from <http://www.ccrwf.org/working/TaxPolicyRecs200.pdf>.

7
Steel, Michelle. ³Sales Tax on Services Would Hurt the Desert´. The Desert Sun. 1Ã May 2008.

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could exploit ambiguity in sales tax law and reinterpret the definition of

tangible personal property to include services at least at the regulatory

level. However, even though the five-member Board is majority Democrat,

she comments that certainly were such a reinterpretation advanced the

issue would ultimately be decided by the courts, which may be a reason

why using the Board in this manner has yet to be pursued.

3‘ ‘‘  ‘C &‘)&  ‘ ‘   ‘

Debates concerning expanding the sales tax base are not new in

(alifornia. Legislation on the topic dates back to 1909 Ȃ more than two

decades before the sales tax on sold tangible property was enacted. Table

3 below highlights some of the legislation introduced throughout the last

roughly one hundred years intended to levy taxes on consumed services. It

is readily apparent from the table that discussions of taxing services have

not been met with much hospitality.

Arguably the most interesting target of past legislation has been

admission tickets to sporting events and amusement parks as they have

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been the subject of tax debates multiple times. Indeed, having failed to levy

taxes on these items in the past, history has saw fit to repeat itself today.

Governor Schwarzeneggerǯs plan to close (aliforniaǯs current budget

deficit involves collecting taxes from admission tickets effective March 1,

2009.8 It is uncertain if legislators will abandon a hundred years of

skepticism and opt to side with the Governor on this issue.

History of tax base reform extends beyond debate in the state legislature.

The (alifornia (ommission on Tax Policy in the New Economy convened in

2002 to review the state's tax and revenue programs in light of changing

consumer behavior and the rapid changes in technology. Amongst the

(ommissionǯs recommendations was the broadening of the sales tax to

include services like vehicle repair, appliance/furniture repair, and

veterinarian services,9 three services which have again found their way

into the Governorǯs current tax reform proposal. Moreover, Governor

Schwarzenegger in 2008 announced the appointment of members to the

(ommission on the 21st (entury Economy whose charged mission is

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8
Lin, Judy. ³Schwarzenegger: $Ã.ÃB in Tax Hikes to End Deficit´. Long Beach Press-Telegram. d
November 2008.

9
California Commission on Tax Policy in the New Economy. Final Report. Sacramento: 200. 12-15.
Retrieved January 2, 2009 from <http://www.library.ca.gov/crb/catax/Docs/200-12_FinalReport.pdf>.

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strikingly similar to the previous Governor Davis-era (ommission:

establish a 21st century tax structure that fits with (aliforniaǯs 21st century

economy.10

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10
Office of the Governor. Executive Order: S-12-08. Sacramento: 2008. Retrieved December 28, 2008 from
<http://gov.ca.gov/executive-order/10928>.

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C ‘ ‘‘

‘ ‘‘   ‘.   ‘‘  ‘C &  7‘

Year Bill Service to be Taxed Status

AB Died in (ommittee on Revenue and
1931 1920 admissions to sports games Taxation

AB Died in (ommittee on Revenue and
1933 1991 amusements and club dues/fees Taxation

AB winnings from auto and motorcycle Died in (ommittee on Revenue and
2276 races Taxation

AB Died in (ommittee on Revenue and
2451 advertising Taxation

AB Died in (ommittee on Revenue and
1937 2572 exhibition of motion pictures Taxation

AB Died in (ommittee on Revenue and
1939 1613 admissions to amusement parks Taxation

AB Died in (ommittee on Revenue and
2074 personal services Taxation

AB Died in (ommittee on Revenue and
2230 event admissions Taxation

AB Died in (ommittee on Revenue and
2231 amusements and club dues/fees Taxation

SB Died in (ommittee on Revenue and
1121 personal services Taxation

AB motion pictures for television
1963 2693 transmission Died on file in Senate

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Year Bill Service to be Taxed Status

SB Died in (ommittee on Revenue and
1967 1213 consumable services Taxation

AB Died in (ommittee on Revenue and
1969 1884 gas and electrical services Taxation

AB Died in (ommittee on Weights and
2046 repair services Measures

AB Died in (ommittee on Revenue and
2233 admission to sporting events Taxation

SB
1985 1343 motion picture production (ancelled on author's request

SB professional sporting event
1993 Died in Senate
611 organizers/pay-per-view broadcasts

exemption of research and
SB
development services from sales and Died in Senate
148
use tax laws

AB exemption from taxation for internet
1997 (haptered
1614 access or online computer services

SB
adult entertainment services Died in Senate
1013

SB
specialized services (ancelled on author's request
2003 400

2005 AB 9 specified services* Died in Assembly

Ș This is not presented as a complete history of (alifornia legislation on service taxation..

* including private club membership, use of (900) and (976) telephone prefixes, marina services,
specified computer programs, aircraft or limousine transportation, accounting or bookkeeping, legal
services, security and detective services, engineering, architectural, or surveying services, and
management, scientific, or technical consulting services.

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While it is unknown at this time what recommendations this more

recent commission will develop, it is not unreasonable to conclude that its

suggestions will not differ dramatically from the Davis-era commission

considering that (aliforniaǯs 2008 economic and budget conditions are

eerily similar to the 2002-2003 conditions. Indeed, Board of Equalization

Member Bill Leonard surmises that the commission may be a wolf in

sheepǯs clothing for tax increases:

The Governor and the Legislature made their
appointments to the stateǯs new tax commission last week.
I hoped the body would seriously dissect the stateǯs
complex tax system, speak to reforms, and enhance justice
for taxpayers. Unfortunately, my review of the appointees
dashes my hopes. What I see looking down the list of
commission is 2/3rds of them who are already disposed to
tax increases. If it is not a set up, it is very close.1

Even though Governor Schwarzenegger has hailed the (ommission on the

21st (entury Economy as a bipartisan endeavor, this has not alleviated the

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1
Leonard, Bill. ³New Tax Commission=New Taxes?´ The Leonard Letter. 15 December 2008. Retrieved
January 7, 2008 from <http://billleonard.org/>.

‘‘

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concerns and skepticism of tax watchdog organizations.2 At least on the

surface, it appears as though Governor Schwarzeneggerǯs tax base

expansion proposal may obtain quasi-independent support and history

may once again repeat itself.

Ã3‘) ‘%  ‘‘C & ‘   ‘

Fox and Murray3 and Murray4 argue that revenue growth from a

successfully efficient service taxation program will consider two

dimensions: revenue adequacy and revenue stability. Revenue adequacy is

characterized by the ability of increased revenues to satisfy a growing

need of increasing long-term public service demands. Stability meanwhile

seeks to ensure a sufficiently funded short-term revenue growth pattern

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2
Frank, Stephen. ³Tax Commission Appointed, Legislative GOP Not Allowed Seat at Table´. California
Political News and Views. 12 December 2008 Retrieved January Ã, 2009 from
<http://capoliticalnews.com/s/spip.php?breved892>.


Fox, William & Murray, Matthew. ³Economic Aspects of Taxing Services´. National Tax Journal Ã1.1
(1988): 22.

Ã
Murray, Matthew. ³Moving the Retail Sales Tax to a Retail Tax: Optimal Tax Considerations´. In Sales
Tax in the 21st Century. Eds Matthew N. Murray and William F. Fox. Washington, D.C.: Greenwood
Publishing Group, 1997. 201.

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to consistently compensate for revolving business cycles. The economics

of both dimensions are considered in turn.

4.1 Revenue Adequacy

An adequate tax system will have long-run total income elasticity

of revenue equal to long-run total income elasticity of expenditures.5

Elasticity is a measure of how a tax system fares against changes in the

economy. That is, it measures the sensitivity of a tax structure in good

economic times, bad economic times, and over the long run by comparing

the percentage change of two values over some period of time. For the

present purposes, the two values are sales tax revenue and income, the

latter of which is used to determine the overall health of the economy;

growing economies will exhibit growth in median incomes and vice-versa.

An elasticity equal to or close to 1 indicates that sales tax revenues

vary directly proportional with income. Moreover, an elasticity greater

than 1 indicates that sales tax revenue has outpaced growth in income

over the long run while an elasticity less than 1 indicates that sales tax
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 1
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revenue has not kept pace with growth in income; the former is called an

elastic tax system, and the latter is called an inelastic tax system (Fox,

2003). Meeting (aliforniaǯs long-run expenditure goals requires an elastic

tax system that produces revenue increasingly proportional to any desired

increase in supplied public services.

On revenue adequacy grounds, in order to justify an increase in the

sales tax base it must be shown that the proposed structure is more elastic

than the current structure. The calculations of sales and use tax revenue

without a service inclusive base vis-à-vis disposable income from 1991 to

2007 can be found in Appendix A. I first determined the elasticity of the

current sales tax base to be 0.558, which indicates an extremely volatile

revenue source. I then added to the tax base estimated revenue that could

be generated from taxing all services save for medical and housing. There

certainly would be many more exemptions than medical and housing;

however, the point is to observe how the elasticity would change given the

extreme circumstance. The calculations reveal that including services in

the base improves the elasticity to 0.849, which indicates the expanded

base is a much better revenue producer than its predecessor.

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As (alifornia does not track receipts from services rendered, in

order to estimate revenue from a broadly expanded sales tax base, I used

Economic Bureau of Analysis data of national consumption of services for

a given year and then divided the figure by (aliforniaǯs population as a

percentage of national population. The figure was then added to the

known sales and use tax receipts for the corresponding year.

(alculating the elasticity of the expanded tax base in this way

makes certain assumptions that certainly force the insightful to question

the resulting value. For instance, it is assumed that consumption of

services corresponds linearly with population. That is, that a 1% increase

in population will result in a 1% increase in consumption of services.

Moreover, the method assumes that only those individuals occurring in

the population count consume services. Also, the revenue figures change

demonstrably were (alifornia to implement a gross tax receipt system, a

value-added system, a sales tax system, or some combination thereof, for

instance. So, it is entirely reasonable to conclude that a service-inclusive

tax base would actually be less elastic than 0.849; though, it certainly

would not be more elastic.

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Proponents of sales tax base expansion, such as (hu,6 often

calculate estimated revenue by using a sample base from another state

and then apply (aliforniaǯs rate to it. This fails to provide a credible

predictor of revenue as the estimates ignore the unique administrative

and structural differences between states. No two state tax structures are

the same, and certainly no two states administer or collect revenue the

same. It is misleading to assume otherwise. Given this obstacle, deriving

(aliforniaǯs revenue estimate from national data appears safer than

assuming cross-state administrative similarities.

4.2 Revenue Stability

A stable revenue source is one in which the rate of revenue growth

is relatively constant across the business cycle,7 and constancy of growth

is contingent upon the composition of the tax base. For instance, a base

dominated percentage-wise by a fluctuating source such as income, which

is a function of the market, often results in fluctuating revenue. In the case

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d
Chu, Judy. ³Letter to California State Legislators´. 21 April 2008.
7
  1, p. 28.
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of (aliforniaǯs current sales tax system, however, the base is composed of

mainly retail purchases, and therefore the degree of revenue growth

necessarily depends on the breadth and depth of the retail items included

in the base.

Like revenue adequacy, revenue stability is often measured in

terms of revenue elasticity.8 However, whereas revenue adequacy only

uses comparative measurements of long-run elasticity, stability requires

comparisons of long- and short-run elasticities. The calculations by Bruce,

Fox, & Tuttle in Table 1.3.1 reflect these elasticities for (alifornia using

1967 to 2000 revenue data. 9 A stable revenue source will maintain a

consistent elasticity, and clearly (aliforniaǯs sales tax, like the income tax,

is not stable. And while there is literature to suggest that an inelastic

revenue system can nonetheless yield

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8
Dye, Richard and Merriman, David. ³State Revenue Stability: Alternative Conceptualizations´. Presented at
the National Tax Association Annual Conference, November 200Ã: .

9
Bruce, Donald, Fox, William, & Tuttle, M. ³Tax Base Elasticities: A Multi-State Analysis of Long-Run and
Short-Run Dynamics´. Southern Economic Journal 7.2 (200d).‘

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cyclically stable revenue,10 the revenue figures in Table 1.3.1 indicate that

this exception does not apply to (alifornia present sales and use tax

program.

C ‘3 3‘ (alifornia Tax Elasticities

Short-Run Elasticities

When (urrent
When (urrent
Long- Revenue Value
Revenue Value is
Run is above Long-
below Long-Run
Elasticity Run
Equilibrium
Equilibrium

Sales
0.833 -1.408 1.146
Tax

Personal
Income 1.749 -1.536 3.223
Tax

Granting the above calculations and the previous work done by

noted authors, inclusion of services in the sales tax base does indeed

produce a less volatile revenue stream, yet it must be considered at what
‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘‘
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economic cost. Floridaǯs 1987 broad-based tax on services such as

advertising, accountants, and attorneys resulted in a mass exodus of

businesses relocating conventions and headquarters elsewhere.11 Texas

was forced to continuously increase its sales tax rate because its tax on

services revenue was falling far below the estimates.12 More recently in

2007 Michiganǯs tax on services would have introduced inequities into the

economy such as tax pyramiding and a higher degree of the tax burden on

the poor.13 A consistent and aggressive onslaught of taxpayer and business

lobbying, however, forced legislators to repeal the law before it was

enacted, which is unarguably a sign that those outside of the capitol

understood the dramatic ramifications the tax would have on their

economy or individual pocketbooks.14

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11
Hill, John. ³Hotels Cope with Convention Losses´. The Orlando Sentinel. 2d July 1987: D-1.
12
Hamilton, Billy. ³Comments on the Taxation of Services Under State Sales Taxes´. National Tax Journal
Ã1. (1988): Ã11-1.

Watson, Steve. ³Governor Granholm¶s Proposed 2% Excise Tax on Services´. Michigan, House Fiscal
Agency: 2009.

See Tuerck, David, Glassman, Ssrah, & Bachman, Paul. ³Tax Changes in Michigan: Measuring the Effects
of Expanding the Sales Tax to Services´. (2007). Boston, MA: The Beacon Hill Institute.
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(alifornia has found itself in massive budget deficits several times

since the turn of the millennium. Expansion of the sales tax base has often

been argued by state political leaders to be the best means of closing

budget gaps without major cuts to social programs and services. The

attempts to implement such tax reform by Sen. Florez (D) in 2003 and AB

9 sponsored by Rep. (oto (D) in 2005 were the most ambitious legislation

pursued to these ends. Recently, however, state Board of Equalization

(hairwoman Judy (hu has championed the reform as the only means of

quickly saving the state government from insolvency since large amounts

of spending (to the degree necessary to avoid insolvency) cannot be scaled

back in a single fiscal year.15 Republicans and fiscal conservative tax

watchdog groups, however, have quickly responded to such proposals that

any tax base increase should be coupled with a cut in the tax rate, a

suggestion not being well-received by the Democratic-controlled

legislature.16

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15
  1d.

1d
Lin, Judy. ³Wider, Not Higher, Sales Tax Seen As Budget Fix´. Sacramento Bee. 27 April 2008. Retrieved
October 1, 2008 from <http://www.sacbee.com/111/story/892911.html>.

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A recurring challenge for politicians supporting base expansion is

enumerating exactly which services should be taxed. For politicians this

dilemma is at heart an issue of equity. Taxing some services while

exempting others generally will disproportionately impact interested

parties, and though it may yield a set of more Pareto-optimal efficient

conditions, it does so at the cost of fairness in some cases to the poor. In

2003, for instance, Senator (edillo, (hairman of the Senate Revenue and

Taxation (ommittee, proposed a tax on services to help eat up some of the

projected $35 billion deficit by the end of fiscal year 2003-2004.17 Though

a proposal was never drafted by Sen. (edillo,18 the tax itself, were it to be

implemented, was argued to be against the well-being of the poor as it

would disproportionately impact them most compared to other economic

classes The tax status of medical services was an issue as was the status of

services consumed by businesses such as consulting and advertising

services. It is generally argued that medical services generally should be

exempt from taxation as it would impose too high a burden on low-income

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17
Chorneau, Thomas. ³Place For Sales Tax on Services Gets Mixed Reviews at Hearing´. San Diego Union-
Tribune. 10 April 200.

18
Legislation to this end was sponsored by Senator Florez in 200, SB Ã00.
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wage earners.19 As for the latter types of services, (alifornia still

sporadically flirts with the notion of taping these as sustainable revenue

sources despite warnings that doing so will introduce potentially

economic destabilizing inequities like tax pyramiding.20

There are at least two major political hurdles which have not

received sufficient attention in scholarly literature were the tax base

indeed expanded: the impact to local financing and the impact to land use

development.21 The former problem arises from the current Bradley-

Burns sales tax system in which 1% of the base state sales tax rate of

7.25% is reallocated to local jurisdictions where the sale occurred.

Because current Board of Equalization regulations allow for retail

corporations to establish a single place of business where no physical

goods are delivered to the consumer, but rather only where the

negotiating and final sale take place, the region that serves as the single

point of sale receives revenue for sales occurring throughout the state.

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19
See Nellen, Annette. (June 29, 2008b). ³Taxing Some Services Could If It¶s Fair and Simple´. San Jose
Mercury News. 29 June 2008.

20
California Chamber of Commerce. Letter to Assemembly Member Coto. 22 April 2005. Retrieved from
<http://ct2k2.capitoltrack.com/05/viewdoc.asp?docid=9772>.;  2d.

21
See a nice discussion of the latter problem in Lewis, Paul and Barbour, Elisa. ³California Cities and the
Local Sales Tax´. Sacramento: Public Policy Institute of California, 1999.

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Actual delivery of goods may occur in other jurisdictions, yet revenue

allocation is only directed to those localities where the sale is agreed

upon.22

This state of affairs creates a strong incentive for local

governments to lure businesses away from other cities and counties. And,

indeed, (alifornia cities have used sales tax rebates as the primary

incentive to attract businesses. For example, the (ity of Fillmore recently

established a relationship with a consultation firm where the city

promises to pay the firm 85% of the 1% Bradley-Burns rebated dollars

from business they brought into the city that generated revenue. The (ity

of Livermore filed suit against Fillmore for using this practice for luring

business from the former jurisdiction to the latter.23 Other (alifornia cities

with established revenue sharing policies include (orona, Huntington

Beach, Los Angeles, Manteca, Oakland, Sacramento, San Francisco, and

Tracy. The (ity of Modesto recently created revenue sharing deals with

multiple petroleum corporations including General Petroleum, Maxum

Petroleum, Boyett Petroleum, and Breshears Petroleum. Under the deal
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22
The sale of jet fuel is an exception to this rule. Monies from the sale of jet fuel are allocated to the
jurisdictions where the fuel is delivered.

Schifanelli, Joyce. ³Sales Tax Revenue Sharing´. The Fillmore Gazette. 2Ã September 2008. Retrieved
from <http://www.fillmoregazette.com/front-page/sales-tax-revenue-sharing>.‘

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with General, the company will receive 65% of its sales tax back if its

revenues exceed $25 million a quarter.24

Though revenue sharing has allowed jurisdictions to increase

budget allocation for education and human services programs,

unproductive competition between cities is often the result. The

Legislative Analyst Office describes the problem aptly:

The main result of the various incentives offered to the
business is simply a relocation of the retail activity from
one community to anotherȄwith no net gain in economic
output or efficiency to the region or state as a whole. In
addition, the cost of the economic incentives drain local
government resources that otherwise would be available
for public purposes.25

Given widespread budget deficits across the state, it should not be

surprising if revenue sharing deals become an established norm of local

financing in the future. However, recent state legislation has ensured that

revenue sharing is severely limited if not eliminated completed. Assembly

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Ashton, Adam. (September 10, 2008). ³Tax rebate for General Petroleum OK¶d´. Modesto Bee. 10
September 2008. Retrieved December 2 from <http://www.modbee.com/local/story/Ã2Ãd11.html>.
25
Legislative Analyst Office. ³Allocating Local Sales Taxes´. Sacramento, LAO: 2008. Retrieved October 8,
2008 from <http://www.lao.ca.gov/2007/sales_tax/sales_tax_012Ã07.pdf>.‘

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Bill 697 signed into law effective October 1, 2008 precludes cities and

corporations from consolidating sales offices into a single jurisdiction for

the sole purpose of receiving rebated sales tax. Indeed, the point has been

made that Modesto rushed through the approval process of its revenue

sharing deal with the petroleum companies in order to beat the effective

date of AB 697.26 Yet, the language is sufficiently vague in the law where

interpretations are possible to ensure that revenue sharing continues

albeit to a much lesser degree.

The second political hurdle arises as a corollary of the first. In

order to attract the retail businesses, cities and counties must plan land

use accordingly. The desire to attract sales tax generating businesses leads

to inefficient land use policy as priority of the best land is given to retail

development rather than housing, schools, parks, state-use, or federal-use

projects (Legislative Analyst Office, 2008). Moreover, this reduction in

supply increases the cost of land, a consequence which presents itself as a

negative externality affecting the state and taxpayers.

These issues have only applied to retail businesses selling tangible

goods since mostly tangible goods heretofore are taxable; however, the
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2d
Modesto Bee. ³Sweet sales tax deal could turn sour for city´. 8 September 2008. Retrieved from
<http://www.modbee.com/opinion/story/Ã2109.html>.
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expansion of the sales tax base to include services will only exacerbate

these problems. Moreover, AB 697 applies only to retailers, yet it is

uncertain if this refers to retailers of tangible goods as well as retailers of

services. Since most of the service transactions taking place in (alifornia

are business-to-business services and not retailed services, presumably

any service provider falling into this category could easily consolidate a

sales office into a single jurisdiction for benefit of rebated sales tax (this

assumes that at least some business-to-business services are taxable).

(ollaboration between state and local governments is necessary to ensure

these issues are mitigated. Failure to do so will undoubtedly result in local

governments continuing to participate in unproductive competition at the

expense of taxpayers.

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Any economically and politically motivated decision to expand the

tax base invariably affects consumer shopping behavior. Levying a sales

tax or gross receipt tax increases augment the final price of a consumed

good or service. Therefore, price-sensitive consumers will seek the most

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cost-minimizing alternative in order to maximize their utility subject to

their budget constraints. The result is a substitution effect of purchases:

shoppers will prefer to purchase their goods and services from

jurisdictions with lower or no sales tax. The advent of the internet as a

medium of commerce only improves the efficiency with which consumers

can substitute goods and services in order to evade paying higher costs

because of additional taxing.27 Moreover, the sheer volume of consumers

that use the internet to consume goods and services prevents the Board of

Equalization from pursuing any legally owed use tax, which significantly

contributes to the $2bn sales and use tax gap Ȃ the difference between

what is owed and what is paid.28

It is uncertain how a tax on services will change consumption

patterns. Business services such as attorneys, accountants, and

consultants can easily be conducted via the internet, yet services such as

gym memberships, veterinarian services, auto repair, and sporting and

amusement park admissions certainly do not appear to be susceptible to
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27
Lenard, Thomas. & McGonegal, Stephen. ³The Streamlined Sales Tax Project: An Initiative Whose Time
Has Not Come´. Washington, DC: The Milken Institute Review, 2005: 18-2d. Retrieved October 20, 2008
from <http://www.pff.org/issues-pubs/articles/050502lenardmilken.pdf>.

28
California State Board of Equalization. ³Addressing the Tax Gap´. Sacramento, 2007: . Retrieved
December 2, 2008 from <http://www.boe.ca.gov/news/pdf/gapdoc.pdf>.‘

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substitution effects to the same degree. Fisher argues that the resulting

equal tax on commodities and services could leave the relative prices of all

goods and services unchanged, in which case a substitution effect never

occurs.29 However, this argument ignores the fact that businesses such as

gyms pay sales tax on their equipment. (onsequently, membership fees

include the tax the business paid for equipment on top of which the

customer will pay the service tax. Therefore, it is ensured that gym

memberships will always be comparatively more expensive than their

tangible goods counterparts sold in brick-and-mortar locations. A

substitution effect is guaranteed, and lawmakers thus have a moral

obligation to ensure that administrative regulations which complicate

taxpayer spending decisions are kept simple and to a minimum.30

Yet these matters beg the question: what constitutes a service?

After all, a fundamental rule of law stipulates that the law must be clear

and publicly accessible.31 If I ask a veterinarian what might be wrong with

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29
Fisher, Ronald. State and Local Public Finance. Mason, Ohio: Thomson South-Western, 2007: 88.

0
American Institute of Certified Public Accountants. ³Guiding Principles of Good Tax Policy: A
Framework for Evaluating Tax Proposals´. Retrieved February 1, 2009 from <http://ftp.aicpa.org/public/
download/members/div/tax/-01.pdf>.
1
Raz, Joseph. The Authority of Law. Oxford: Clarendon Press, 1977: 21Ã.

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my dog, does that constitute a consultation or a taxable service?32 Would

the answer change if I see my vet taking a jog, or if I see him inside a

grocery store and stop to ask him? Or if I ask a financial advisor to make

certain changes to my portfolio, is the state going to tax me for only the

specific instance she performed a service, or levy the tax on the value

added to the portfolio because of her performed service, or both? It also is

extremely plausible to argue that the very act of providing tangible goods

to consume is itself a service. Does that therefore mean I may pay a tax to

the retailer for the privilege of retailing as well as a tax on the tangible

good?

Some of these questions are easily answered and are

unproblematic, yet the inability to isolate the necessary and sufficient

conditions that define a taxable service and those individuals liable to

perform them remains a challenge to any proposed reform. The issue

plagued Texas in the 1980ǯs, for example. Hamilton notes that debt

collection services if performed by a collection firm were taxable, yet the

same service performed by a lawyer was not taxable.33 Similarly,

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2
As of the time of writing, Governor Schwarzenegger¶s tax proposal does not include consultation services.

Hamilton, Billy. ³Comments on the Taxation of Services Under State Sales Taxes´. National Tax Journal
Ã1. (1988): Ã11.

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insurance adjustments performed by an insurance company are taxable,

yet those performed by an in-house adjuster are not. The stateǯs

(omptrollerǯs office faced enormous problems in implementing the tax

because of this uncertainty.34 Massachusettsǯs 1990 tax on services

suffered from similar administrative complications because of an inability

to define terms such as Dzlegal servicesdz, Dzengineering servicesdz, and

Dzbusinessdz.35 The tax was repealed two days after it was implemented.

Similarly, Marylandǯs 2007 tax on computer services was repealed the

following year because of Dznumerous challenges related to [its]

implementation.dz36 (alifornia is threatened to suffer a similar fate if clarity

is not pursued as an end itself. The more difficult it is to decipher when a

service is or is not taxable then the more difficult it will be for lawmakers

and tax administrators to meet their moral obligations to taxpayers of fair

tax policy.

‘

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Ã
` : Ã12.
5
Aldridge, Vincent. (2007). ³Letter to Ann Gordon´. 2 November 2007. Retrieved January 22, 2009 from
<http://www.floridatbrc.org/pdf/11_5_07DORHandout.pdf>.

d
Comptroller of Maryland. ³Franchot Pulls Draft ³Tech Tax´ Regulations from Website; Applauds Efforts
that led to Repeal.´ 8 April 2008. Retrieved January 1Ã, 2009 from <http://www.marylandtaxes.com/
publications/nr/current/pr18.asp>.

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¯3‘+ ‘

With rare exception debate concerning expansion of the sales tax

to include services only surface during times of economic downturns when

state revenues are the leanest. Indeed, despite Floridaǯs attempts to tax

services in the wake of massive budget deficits in 1987 and then again

following the collapsing of the dot-com market in 2002, it also exists as the

only exception to the general rule known to the author. In 1997-98 Florida

was enjoying a strong economy and the legislature was given a chance to

stabilize its revenue sources by voting on a then revenue-neutral reform

package including lifting tax exemptions of many services.37 The reform

was voted down. This almost chronic inability to tax services during weak

and strong economic times begs for further research.

(ertainly, how (alifornia lawmakers deal with the difficulties

detailed herein will influence greatly whether the state engages in a

seemingly futile effort like Florida, or whether it can eventually muster the

leverage and momentum to overcome political and lobbying dissent like

New Mexico. This is not to suggest that New Mexico is not faced with

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7
Nabors, Robert. (200). ³An Opportunity Lost: Tax Reform and the 1997-1998 Constitution Revision
Commission.´ Florida State University Law Review 0.Ã77: Ã77-Ã8d.

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criticisms regarding its consumption-based taxes. In fact, complaints

leveled against their gross receipt tax structure are often harsher and

more constant.38 Yet despite the criticism two facts make the case of New

Mexico standout. First, it is the only Western state that has successfully

implemented a broad-based tax on services. Second, by doing so it creates

a considerably more stable source of revenue compared to (aliforniaǯs

system.39 It is unlikely that New Mexicoǯs system could be adopted in

(alifornia given the dramatic socio-economic, political, and population

differences that serve as catalysts for equity debates. New Mexico

nonetheless provides a glimpse at the benefits (aliforniaǯs lawmakers

could reap if a sales tax on services were enacted. However, overcoming

the political, administrative, and taxpayer equity obstacles, as they say, is a

horse of a different color.

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8
See Gessing, Paul. and Messenheimer, Harry. ³New Mexico¶s Harmful Gross Receipts Tax: A Warning to
Other States´. Rio Grande Foundation Policy Brief. (2007).
9
  19, Table 
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‘‘
‘(‘) ‘) ‘* ‘+ ‘
% ‘
‘
!‘‘ ‘(  ‘
  ‘ ‘‘(  2‘ ‘#  ‘
‘
‘
‘
This paper is an attempt to model an economy that retains the most

important features of the capitalist, competitive model, while providing a

rationale for and a description of the regulatory framework needed in the

21st century. Let us begin by separating what government is from what it

does. Its very existence requires funding, and thus the taxation of its

citizens and the substitution of public preferences for private ones. Even

the liberties we most value as a free society require a legislative, police

and judicial establishment that also abridges liberties through law-making

and enforcement. Being a government of the people, public actions are

sometimes viewed as unpopular. Wars that cost trillions, (generally

borrowed money, given the expediency of policy, and thus paid for by

generations that had no say in that policy), and that were fought for

dubious reasons, are the obvious example of this problem. However,

depending on oneǯs point of view, regulations and laws concerning such

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disparate areas like immigration, alcohol and drug abuse, energy policy,

political expression, and many others can also be discussed in this context.

The point is that when government acts, some citizens are favored while

others are hurt, and the latter group will blame government for what it is,

as well as what it does. How do we create a government that is nimble

enough to address problems as they arise, intelligent enough to formulate

the appropriate legislation, and cohesive enough to administer those

policies in an optimal fashion?

As we contemplate the new administrationǯs challenges and plans to

remedy the current economic disaster, citizens of all stripes are weighing

in on the short term monetary and fiscal policy fix appropriate at such

times. This paper concentrates its focus on economics, and looks to the

long term and asks whether there is a framework of governmental action

that would preserve the best features of competitive capitalism while

avoiding its worst. The first step in this process is to establish guidelines

that provide a sounding board for appropriate action, viz.

'+   !‘

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1-Globilization is a reality and nocountry-based regulatory scheme can

hope to be effective. Nations must begin to cede economic power to

supranational governors, much in the way the Europeans have done with

their monetary and labor environments. Americans are not alone in their

reluctance to participate in these schemes. Great Britainǯs reluctance to

join the European (ommunity and to adopt the Euro point out the

difficulties inherent in creating any global body that will substitute the

international communityǯs voice for that of the nation.

2-Realism should be a word constantly watched. We will always confront

scarcity. Neither good government nor efficient markets can eliminate the

excess of human wants over the means to satisfy them. Therefore public

action should be described as ameliorative, not a means to an end of all

our problems. In American politics this prescription is especially

important. We are so accustomed to the hyperbole of advertisers that

realism is mistaken for a lack of urgency, and thus problems and their

remedies are described using superlatives, which in turn breeds

disappointment and suspicion.

C‘)& ‘‘(   ‘
"‘+  ‘

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The S.E.(. was created by the Securities Exchange Act of 1934.

DzWith this Act, (ongress created the Securities and Exchange (ommission.

The Act empowers the SE( with broad authority over all aspects of the

securities industry. This includes the power to register, regulate, and

oversee brokerage firms, transfer agents, and clearing agencies as well as

the nation's securities self regulatory organizations (SROs). The various

stock exchanges, such as the New York Stock Exchange, and American

Stock Exchange are SROs. The National Association of Securities Dealers,

which operates the NASDAQ system, is also an SRO. The Act also identifies

and prohibits certain types of conduct in the markets and provides the

(ommission with disciplinary powers over regulated entities and persons

associated with them.

The Act also empowers the SE( to require periodic reporting of

information by companies with publicly traded securities.dz These

paragraphs are taken from the S.E.(. website. The problem is that the SE(

does NOT have Dzauthority over all aspects of the securities industry.dz

Absent from its purview are entire industries, (such as hedge funds), and

products which have amazing powers to create and destroy wealth, (such

as derivative securities). Nor is this a new issue. The portfolio insurance

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discussions of the 1990ǯs, and the triple-witching hour phenomena of the

1980ǯs were explicit recognitions of the Dztail wagging the dog.dz Today we

have credit default swaps and mortgage backed securities as well as other

securitized loan products whose size apparently dwarfs that of the equity

markets and whose supervision is either non-existent or housed

somewhere other that at the S.E.(. I suspect that the coming decades will

see more innovation in finance and that a framework seeking to regulate

the marketplace needs to anticipate these innovations and take an

appropriate oversight role and develop behavioral rules which allow these

innovations to deliver economic benefit without creating the seeds of the

next disaster.

So what additional factors can be identified to create the maximum

benefit from a flexible, global and realistic system of financial market

regulations?  

‘ 

The (ongress must pass legislation that addresses the economic

realities of the present and future. To do that these legislators must

understand economics. Unfortunately they do not. This is not an

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American problem, but rather an international reality. ô 
in the

2/21/2009 
bemoans the lack of economic literacy in

contemporary British politics. Furthermore, no framework will achieve its

goals if the bureaucrats charged with its execution are incompetent or

unmotivated. Why is it that regulators are intimidated by those whom they

regulate? Do they feel intellectually inferior to their private sector

colleagues? Arthur Levittǯs recent admission that during his time as S.E.(.

(hairman he often called Bernard Madoff to get the latterǯs wisdom and

advice on the workings of financial markets would be hysterically funny

were it not so tragically illustrative of this problem. Are they given work

loads that make proper understanding impossible? Do they envision a

future in which they become employed by those private firms armed with

government experience and contacts?

We must cultivate a culture of national service. For too long the

term bureaucrat has had negative connotations attached to it. This is a

product of prejudice, and not necessarily an accurate description of the

function and efficiency of those government employees. To the extent that

this description is prevalent, a disincentive exists for capable workers to

enter those fields. This in turn could produce exactly the result we desire

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least - agencies staffed by poorly motivated individuals, drawn from the

bottom of their graduating classes. Moreover, the increasing

sophistication of the fields these bureaucrats oversee requires a staff of

lifetime learners who keep up with the technical and scientific innovations

relevant to their workloads.

We must reward public service with incentives based on

achievement. This means salaries and benefits akin to those in the private

sector. It also means creating intangible rewards that confer higher status

on these individuals.

Establish DzPublic Service Academiesdz like those that train military

officers. Why not create colleges overseen by and financed through

cabinet secretaries who will eventually hire these graduates? We seem

justly proud of the officers and enlisted personnel who defend our

country. Surely they too are bureaucrats. Why the absence of invective

and denigration. One reason is the universal realization that their function

is crucial and their service Dzpublicdz.  

‘+ ‘

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As mentioned above, hedge funds are currently beyond the scope

of federal securities regulators, as apparently is mortgage origination. The

idea that these trillion dollar marketplaces should exist without oversight

is ridiculous. Not only does the current situation give them an unfair

performance advantage over their regulated competitors, say mutual

funds, but it also creates an environment in which unregulated financial

institutions can exploit market flaws and create imbalances that threaten

the safety and soundness of the system at large. 

‘  ‘

While a free and vibrant privately owned media is an essential part

of our society, their anti government bias is unmistakable. Some of this

stems from their relationship with government as regulator, some from

corporate sponsorship and thus their anti-government message, and the

rest from a truthful accounting of governmentǯs follies. Iǯm sure that it

would be hard to make compelling programming out of annual awards for

outstanding public service, (after all, the red carpet, the glamorous

nominees, and the riveting victory speeches from Oscar Night would all be

missing), but I believe an attempt is worthwhile.

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. ‘ ‘

If that government governs best which governs least, (apparently

handed down to us from Thoreau, Emerson, and C   
Ž  



!" Ž
% #part of our discussion should center on

the determination of where government action is necessary and effective.

Moreover, some sort of Dzsunset provisiondz should accompany enabling

legislation to avoid having a bureau assigned to an obsolete function.

(learly, the function of government is NOT to prevent all business failures,

plant closings, and personal bankruptcies. Neither is it to allocate capital

among competing industries and firms. 

 ‘ ‘ ‘%  ‘

Perhaps the thorniest issue here is the need to protect the public

interest while ensuring that the fruits of entrepreneurial innovation are

not lost. Agencies like the Food and Drug Administration, the (onsumer

Products Safety (ommission, OSHA, and the Securities and Exchange

(ommission all struggle with this challenge. Recent disasters in financial

services illustrate this point vividly. (ommercial banking has been

regulated by the central government for all but a 30 year period from 1837

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Ȃ 1863. The rationale is that these banks create the national currency and

that their ability to honor deposit liabilities must be ensured. How to do

this is unclear, but frequent audits, cash reserve requirements, deposit

insurance, and emergency lending facilities seem to be important. Non-

bank members of the community, (insurance companies, investment

banks, pension funds, mutual and hedge funds), have also become too big

and too important to leave without oversight, but the appropriate

oversight and policy directives are still evolving. Today, the US Treasury

and Federal Reserve are acting in unprecedented fashion to prevent a

complete collapse of the system. I find the idea of the Treasury acting as a

buyer of assets for which markets have ceased to function a particularly

attractive remedy. It addresses the problem of illiquidity in the financial

system by substituting cash for securities on private balance sheets, and

should ultimately be less costly than nationalization schemes since those

assets should appreciate as the system returns to normalcy. Should they

succeed the congress will then decide how to prevent a similar

catastrophe from reoccurring.

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The purpose of this paper is to provide a discussion of new forms

of governance and the affects leading up to it. The interconnectedness of

the world has led to changes in governance to effectively manage the

social, economic, and political changes. If left unimpeded, there will be a

natural strive towards efficiency, just like the efficiency of the free market.

This new form of governance is pluralistic and democratic in nature.

I will begin my paper by giving a preliminary discussion of

governance Ȃ what it is and how we arrived from a state-centered form of

governance to a decentralized one that involves multiple actors, both

private and public. I will then discuss the factors that have led and will

continue to lead to new forms of governance. I will then explore the new

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forms of governance and the problems that it faces in the existing

literature. 

"+‘%  ‘

What first needs to be addressed is the notion of governance. The

term itself is considered to be persuasive and has different meanings.

Some of the different types of governance are corporate governance, good

governance, collaborate governance, risk governance, and global

governance. I choose to define governance as the rules, regulations, and

management style of a given entity to fulfill a certain goal. The best form of

governance is one that achieves the end goal in the most efficient manner,

but also in a way that takes human values into consideration such as

working together to achieve equality, rights, and justice. Democracy is

achieved based on the pluralistic nature of governance Ȃ often having

multiple actors working together to achieve a common goal and these

multiple actors acts as a check and balance on each other through the

deliberation and collaboration process.

It would be helpful to understand the theory behind what used to

be a popular form of governance Ȃ state-centered or centralized

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governance. The theory that led up to this is that society will fall apart

unless there is a strong, centralized authority managing the day-to-day

aspects of society. People are too selfish to work together to achieve a

common end, and for this reason, there has to be a higher authority to take

care of the publicǯs needs and to act as an overseer. It turns out that too

much centralized control often leads to inefficiency. A good example is the

command economy. Many now favor a less centralized form of market

system Ȃ that of the free market, because it is the most efficient form of

system that results in the best prices for consumers due to competition

and innovation. This process is natural because these are the end goals

that we want to achieve in the market system. The same argument can be

applied in other areas such as the management of society. There has been

a trend towards a less decentralized form of governance, undertaken by

multiple actors, both private and public, to achieve a more efficient way of

arriving at the end goal. I argue that this is a natural process because it is

better to achieve the same goal with the least amount of resources

possible while maintaining accountability and transparency. A multitude

of private actors have emerged to take over many of the functions of the

public actor. The state now takes on a
  rather than a  

function. That is, the government these days has only enough power to stir
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or help guide public policy rather than dictate policy because other

agencies, both government and non-government agencies, also undertake

this task as well Ȃ no one single institution as ultimate authority.

Nonetheless, the state continues to grow to keep up with the growth and

complexity of the world, and for this reason, it still has a very important

function to play.

(  ‘.  ‘‘:‘( ‘‘' ‘

‘ The most apparent factor leading to a change in governance is the

trend towards achieving efficiency. This includes cutting back unnecessary

resources such as time and cost. There has been a trend from rule-based to

results-based because in the end, itǯs about achieving the desired outcome.

A common structural problem that leads to inefficiency is the nature of

traditional style management, particularly top-down or hierarchical

management. A detailed discussion on this issue will be provided later on.

Another leading factor of the new style of governance is due to

globalization. David Held describes globalization as the Dzstretching of

intensification of social, economic and political relations across regions

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and continents.dz1 The world is becoming more and more interconnected.

New information technology has enabled us to send vast amounts of

information, such as news, across the entire globe. A remote part of Asia

can see and hear what is going on in the United States and vice versa. We

are thus influenced by other people in other cultures through

communications technology such as the television, the telephone, and the

Internet. Another sign of the interconnectedness of the world is that of the

financial market. The financial market is linked through information

technology. (urrency can be transferred and traded globally in a matter of

seconds. Goods, services, and investments can also be purchased in the

same manner. This, however, has led to market interdependence. If there

is a financial crisis in one region of the world, such as Southeast Asia, it can

have a profound effect on the entire global financial market. Another way

our world is boundless is on certain important issues such as global

warming. The massive amounts of carbon dioxide and other green house

gases will affect the global and not just the regional climate. For this

reason, the industrialized countries must collaborate with one another to

keep global warming under control. An important common interest is at

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David Held, ³Regulating Globalization? The Reinvention of Politics,´ `      
, 1Ã (2)
(2002): 95.
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stake. There is also a need for regulation to manage neomercantilism.

Things such as strategic trade and intellectual property rights must be

protected, and this must be done on an international scale, which leads to

the necessity of having international regulating agencies. Regulation also

helps to legitimize markets and helps to facilitates transactions by

enhancing trust among multiple actors.

Global interdependence leads to a non-traditional, non-unilateral

ways of solving problems. Both public and private actors must work

together to arrive at an efficient way of achieving goals, which can be too

difficult to achieve unilaterally. Globalization also effects democracy. It

leads to multilateral sources of power, a larger scale of society and of

government, a diffusion of power, and it leads to the new boundary

problem. A new system of governance emerges to cope with these issues.

C‘:‘*‘‘' ‘ 

$ 

÷ 


Before discussing in detail about the different forms of governance

that has shown up in the existing literature, I would like to discuss about

the important attributes of the new form of decentralized governance. It is

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decentralized because there are more actors involved, which may or may

not include public actors. Multiple actors often work together to share

resources such as information. Together, these actors form a network. To

help achieve accountability, these agencies ought to be transparent Ȃ the

day-to-day activities including its accounting practices ought to be made

available to the public. The issue of accountability in the new form of

governance is problematic as we will see later on. It is common for

management to be bottom-up instead of top-down because ordinary

people have a greater say in the operations and in the policy making

process. It is also a horizontal style of management because multiple

actors are involved, working together and sharing resources and

information to achieve a goal. This newer form of governance also usually

involves the local community, and it is also problem centered. There is a

clear and practical problem that needs to be addressed, and the goal is to

achieve it in the most efficient way possible. There is also a shift from the

traditional rule-based style of management to a results-based style of

management. Once again, the emphasis is on whether or not the goal is

being achieved in the best possible manner. Let us now explore the various

aspects of this new form of governance.

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Governance, since it often involves multiple actors, can be

described as a network. Mark Schneider states that networks form the

core of governing structures.2 It is a more horizontal form of organization

with each actor playing an important role. Networks can also be

characterized as having high levels of interdependence and multiple levels

of organization. As a result, the formal lines of authority are blurred. What

was commonly centralized control is now dispersed.

Networks stimulate collaboration and cooperation in several ways.

First, it promotes deliberation. Since there are multiple actors, they must

learn how to work together to achieve a common goal. Private actors will

have a say while working with public actors. It also encourages the people

who are affected by regulation to be involved. What was traditionally a

hierarchical command and control style of management now becomes a

bottom-up and horizontal style of management. The entire process

becomes a cooperative process, rather than an adversarial one. It is more

democratic and less authoritative.

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Mark Schneider et al., ³Building Consensual Institutions: Networks and the National Estuary Program,´
ª        , Ã7 (1) (200): 1Á ± 158.

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There are several key factors that lead to the success of networks.

The first comes from individuals making Dzmutually beneficial exchanges

and agreements that otherwise would not take place.dz3 The second comes

from the sharing of resources, such as the sharing of information. The

third is the increase of commitments to fulfill the agreements, which

results in higher creditability for these actors. The main constraints of

these networks are the costs associated with development and

maintaining contacts.

€V ÷ ! 
!Ž&€V!#

Now that we have examined the basic underlying structure of this

newer interdependent, networked, and decentralized form of governance,

we can focus on more specific models of governance. A new style of

management to reflect the new world of governance is called New Public

Management (NPM). NPM has several goals in mind. The first is to apply

the corporate model to increase efficiency. The second is to take existing

groups and make them more efficient. The third is to create autonomous

agencies to respond to market forces. The overall goal of NPM is to make

the state more efficient.

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Ibid. 1ÃÃ.
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The primary reason for NPM is due to the inefficiency of the public

sector. The public sector does not respond to market forces like the

private sector does. It is also not responsive to the public. For these

reasons, there is very little incentive for the public sector to change in

order to be more efficient. NPM creates market-like conditions such as

contracting out services, productively is measured by the outcome, more

control is given to managers and accountability falls on them, reward and

punishment is based on performance, and agencies are freed up so that

they can hire and fire as they please. A major shift is the focus on outputs

rather than inputs. The output is the thing that is done to achieve the goal,

or the outcome, and this is what is being measured. The emphasis is

therefore whether or not the end goal is achieved and how successful it

has been achieved.

NPM faces a serious problem. Measuring the outcome is

problematic because it is a difficult task and it could lead to unintended

consequences. An example would be the standardized tests in secondary

school. These tests are administered with the intention of measuring the

teaching effectiveness of each school, and ultimately of each teacher.

These tests can cause the teacher to change his or her teaching style in

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order in order to achieve higher standardized test scores, which can

undermine a more valuable kind of education that is being given to the

students. 

ŽV
   
'%& V'#

Another form of governance that has emerged is called

empowered participatory governance (EPG). In this case, ordinary people

in a local community have control over governance, and this is a form of

decentralized governance. One case study is the governance structure of

several public schools in (hicago.4 These schools were some of poorest

performing schools in the nation. The state decided to try something new

by giving each local community control over the management of the

schools. (oncerned parents and teachers came together to figure out what

was effective and what needed to be changed. The end effect was a large

improvement over the quality of these schools. The basic criticism of top-

down management or centralized control, especially in this case, is that

management is too disassociated from what they are managing. Since they

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Ã
See Archon Fung and Erik Olin Wright, ³Thinking about Empowered Participatory Governance,´ in
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9 `    `          (San Francisco:
Analytical Psychology Club of San Francisco, 200), pp.  ± Ã2.

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do not have firsthand experience of the situation, they end up making bad

management decisions.

There are three principles in EPG: practical orientation, bottom-up

participation, and deliberative solution generation. All are effective for

obvious reasons, but the source leading to its effectiveness also leads to

problems. This form of participatory governance is Dzvulnerable to [a]

serious problem of power and domination inside deliberative arenas by

powerful factions or elites.dz5 This is a good criticism, but one that should

not be taken too seriously. Anytime a group of people get together to

achieve a common goal, there is bound to be difference of opinions and

power struggles among the contenders, which are the natural results of

democracy. The greater the diversity of people and their opinions, the less

likely there will be a concentration of power. And even if there is

domination by one group, it will be open to scrutiny by other members.

Let us now explore some of the challenges facing the new world of

governance.

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Ibid. .

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The first issue I would like to talk about relates to the last criticism

about the domination of elite forces. Jo Beall raises this criticism while

writing on the issue of decentralization and international development.6

Beall argues that decentralization is a core component of international

development. The positive benefit of decentralization is that it improves

accountably, transparency, and state-society relations. The negative

consequence of decentralization is that it can lead to elite capture, toward

pork-barrel politics, and local governments can be deprived of human and

financial resources to cope with the demands of centralization, as was the

case with South Africa. Beall also states that deregulation does not work

well in rural areas because they are more traditionalists and because rural

areas are poorer, therefore they provide less revenue for the government.

More general problems about regulation include the fact that

regulations adds to the cost for industries, and the consumers will likely

pick up these costs if the industries want to retain more profits.

(onsumers, however, are willing to pay only so much for a product before

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Jo Beall, ³Decentralizing Government and Decentralizing Gender: Lessons from Local Government
Reform in South Africa,´     ,  (2) (200): 25-27d.

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they decide to purchase the same or similar product from another

manufacturer at a more affordable price. As markets continue to expand,

more regulation will be required to keep these markets operating

efficiently.

Another key issue is that of legitimization. States need to legitimate

their actions through science, which leads to Dzrisk analysisdz. The problem

with risk analysis is that it can become politicized, such as the example

with the FDA. This also raises the question as to whether or not all forms

of regulatory agencies can operate without the coercion and influence of

outside forces such as businesses or political parties. In the case of the

FDA, the answer is no. The same people who they were watching over also

provided them with funding. They are also subject to a social and ethical

dilemma Ȃ the side effects and effectiveness of new drugs cannot truly be

determined until it has been given to the general public. In a scientific

study, the greater the number of participants involved in the study, the

more reliable the study will become. The pharmaceutical companies only

conduct a study based on several thousands of people. Nevertheless, there

is pressure to get these drugs onto the open market because they have the

potential of creating greater utility, such has helping people with harmful

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conditions, than resulting in negative ones, such as death. The dilemma the

FDA faces is whether they should hold ethical standards above maximizing

utility or the other way around. 

+ ‘‘

Anne-Marie Slaughter states that it is paradoxical that we want and

need more government on a regional and global scale, but at the same time

we want less centralized control and coercive authority that takes power

away from the people that are being governed.7 Institutions are beneficial,

but they can also be oppressive. It is further complicated by the concern of

accountability. The solution that she offers is having government networks

because it is a pluralist form of governance that will increase

transparency, accountability, the sharing of resources, and most

importantly, it will promote democratic principles such as deliberation

and cooperation to achieve a common goal. It is also important that the

people affected by regulation are involved in the regulation process. The

end goal of the state is to provide services for its citizens in the most

efficient manner as possible without undermining the quality of service.

Private actors are often able to perform this function better than public

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Anne-Marie Slaughter, ª  M   (New Jersey: Princeton University Press, 2005).
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ones. For this reason, the private sector is becoming more involved and

has a greater say in public policy. They are the rowers and the states are

now the stirrers. Just like the market system, there will be a natural strive

towards greater efficiency, because to do so is to achieve the function of

management in a more excellent manner. What is better is more desirable,

and in this case, it is the desire to have a more efficient form of local,

regional, and global governance. This is the reason why a new form of

governance has replaced the old one. In the Darwinian sense, the fit as

outlived the unfit.

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"‘ !
9      
     

Brock Bahler is a graduate student in philosophy at Duquesne University.
He specializes in continental philosophy of religion.
‘
'‘!‘
<       
      
Geoffrey Propheter is a current graduate student in the Public Policy and
Administration Department at Sacramento State University. He earned his
M.A. in philosophy from San Jose State University and his B.A. in
philosophy from Sacramento State University. His research interests
include tax policy, moral foundations of taxation, political philosophy,
philosophy of economics, logic, and philosophy of science. 

‘(  !‘ 
  
   ! "      
Dr. Ronald Filante, an expert on )‘    2‘: ‘    2‘ ‘  
 ‘  , is an associate professor of finance and economics at
the Lubin School of Business. He serves as a consultant to numerous
organizations and individuals and is an independent director of the TIP
family of mutual funds.‘

C+‘.!‘ 
#  ‘
Mr. Le currently holds a Bachelor's degree in Psychology and a Master's
degree in Philosophy from San Jose State University. He has taught courses
in philosophy including Introduction to Philosophy, Introduction to the
Philosophy of Religion, Logic and (ritical Thinking, (ritical Thinking and
Writing, and Moral and Political Philosophy at San Jose State University,
De Anza (ollege, Diablo (ollege, and San Jose (ity (ollege, all located in the
San Francisco Bay Area, (A. Mr. Le is the co-founder of The American
Future.‘

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We are now accepting papers for the Fall 2010 edition of The American
Future. All papers will be considered.

C ‘
( ‘00‘)  ‘
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Our country is divided, seemingly more than at any time in our history,
along party lines. This division has brought a harshness to the political
rhetoric that seems to remove all hope for bi-partisan solutions to any of
the more urgent problems we face.

Perhaps only academia can raise the intellectual level of the discussions.
In the next volume of the American Future we would like to publish papers
which address major issues facing the United States with a truly bi-
partisan approach. We expect each paper to define the problem being
addressed, describe the philosophical issues presented by the problem for
both major political parties, and proposed a solution which is sensitive to
these philosophical issues.

In addition, papers on American culture, government, economy, military
strategy and political thought are welcome.

Submission Deadline: August 1, 2010‘
‘

Submit at: www.American-Future.com/Submit

‘

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1. Papers should be the original, unpublished work of degree candidates or
the faculty in the disciplines of philosophy, political science, and/or
economics.

2. Papers should be between 3,000 and 6,000 words, and should not be
merely descriptive. It should be an attempt to provide a solution for a
particular problem or offer a new interpretation of an existing one.

3. All references should be listed in MLA style. Use footnotes to cite your
sources.

4. All papers will be reviewed anonymously. The author's name should not
appear in the paper itself.

5. Include a cover page, that, states your name, affiliation, address, e-mail,
and telephone. Please provide a short biography of the author, and a 200-
500 word abstract of the piece being submitted.

6. Submit the final copy to The American Future online at
www.American-Future.com/submit.html or e-mail to
submissions@american-future.com‘

7.Acceptable file formats are MS Word and ETEX.‘

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