The Future of Governance in Europe
Text of a speech I gave in the European Parliament building on November 27, 2018
Between the 10th and 15th centuries, during the high Middle Ages, Europe had its longest period of sustained economic growth. During those years, the weather was warmer than it is now. The population boomed. It was a time of dynamic invention, stunning architecture, huge improvements in agriculture and food production, the growth of sophisticated trading and transport networks, larger healthier families, and improvement in the standard of living. During this time, more than 70 universities were founded, many of which survive today. For five centuries, Europe led the world out of the dark ages and paved the way for prosperity.
Today, Europe is fast asleep. For the past twenty years, the European economy has grown at an average rate of 1.8 percent, lower than any other continent except Antarctica. Europe is driving down the road with one foot lightly on the gas and the other foot firmly on the brake. The brake is being applied here in Brussels.
In the next 16 minutes, I will present four government problems and twelve ideas for discussion.
1 The Great Financial Crisis
From 1992 to 2007, the US government incentivized banks to lend more than $4 trillion to low- and middle-income Americans, so they could own their own homes. By 2008, about half of all American mortgages were categorized as sub prime. These mortgages were very risky, made with very low lending standards. When people started defaulting on their adjustable-rate mortgages, they lost jobs and income, output dropped. Banks were overleveraged and started to fail.
Then the Fed, fearing inflation, did nothing to stimulate the economy. The Fed turned a banking liquidity problem on Wall Street into a worldwide financial crisis that put billions out of work for five years. Those who suffered the most during the recession were the very low-income people the government had been trying to help.
In Europe, the European Central Bank reacted the wrong way to the US liquidity crisis. They raised interest rates, causing a European recession they could have prevented. In fact, the Australian government was far more pro-active, stimulated growth, and they didn’t experience the recession.
It was popular to blame evil, greedy bankers, but the real story is about government incentives and monetary policy.
What if fixing the banking system isn’t the problem? Banks just do what the rules allow. Banks are rent-seeking middlemen whose franchise is protected by law. What if half the problem is the governance of banks? What if the other half is governance of our money supply?
2 Anti Money Laundering
Anti-money-laundering and anti-terrorist financing laws — do they work? Here in Europe, we spend about 70 billion euros per year to seize about one billion in assets, about one percent of all money laundered. Seventy billion euros to catch one billion. AML is a barrier to entry, removing small nimble competitors. The largest banks love AML, yet it is a contender for the least effective regulatory intervention, ever, anywhere.
What if the real reason for most regulation is to make politicians look tough on crime?
Have you noticed that getting wifi at airports, coffee shops, and hotels is now open? You don’t have to give a phone number any more, because they are too scared of GDPR. These networks are now making the public easy prey for hackers to get their passwords and data. GDPR threatens many other key parts of the Internet and systems we use every day.
Let me ask you this: How many EU governments are fully GDPR compliant? How many EU governments will ever be fully GDPR compliant? GDPR started with the right idea but went about 800 pages overboard, and now it’s no longer the solution, it’s the problem.
What if regulation does more harm than good?
There are many ways to vote. People like me who study voting theory show that there are far better ways to vote than the mechanisms we use now. There’s a new app that lets citizens give feedback on each issue as it comes before parliament, so Members can take the pulse of their electorate before they cast their vote. Does that help make good decisions? Most people, including MPs, don’t even read the legislation they are voting on, it’s very difficult to come to a balanced view of the facts, the details matter, and the numbers are easily gamed.
Blockchain will allow us to build tamper-proof voting systems. Yet, digitizing and decentralizing existing voting methods will give us the same results we have seen in the past.
What if voting isn’t the problem? What if representational government is the problem?
If we were starting over, we wouldn’t design today’s systems the way they are at all. Now I’m going to give 12 concepts that may help us take our foot off the brake and get Europe going again.
Skin in the game
Nassim Taleb “Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.”
Without skin in the game, regulations and rules get more and more complex, and less and less relevant. This collective complexity — everyone adding something in to look like a hero — is choking our economy. We need a more competitive atmosphere. We must become more agile. We must do experiments, fail quickly, learn and adjust to new realities on the fly. Skin in the game — taking responsibility for successes and being penalized for failures — will outperform rules and regulations that are hard to change.
What if you paid to vote? What if it cost 2 euros to cast a vote? Does that make sense? I will add two additional rules …
The first rule is that each successive vote costs twice as much as the previous one. So it costs 2 euros for one vote, 4 euros for the second vote, 8 euros for the third vote, 16 euros for the fourth, 32 euros for the fifth, etc. So ten votes would cost 1,000 euros, twenty votes would cost one million euros, and thirty votes would cost one billion euros.
In this scheme, you put your money where your mouth is. If your choice passes, your money is well spent, and if it fails, you lose your money. This gives people an incentive to try to influence the vote on matters they are most passionate about. In practice, few people will cast more than three votes. This method presents an alternative to giving money to advocacy groups who then spend it on media and messaging .
In an alternative version, you can save your vote and use it for another issue later, so you could vote ten separate times, or save those votes and cast ten votes for the one thing you care most about.
The second rule is that 100 percent of the money collected is then redistributed evenly back to all those who voted. So if you paid $2 to vote, you’ll get more than $2 back. In this way, everyone who votes will have some small profit — those who vote more will pay for others to make a profit, so the cost to the government is neutral.
Quadratic voting is just one new idea that lets us use skin-in-the-game mechanisms to more accurately direct policy decisions. It may need to be modified, or it may simply provide new ideas that lead us in a better direction. There are many variants and ways to do it. Almost anything is an improvement over the way we vote today. Another approach I like is Range Voting, which I describe in my essay, Voting Ninja. There are several more radical new market-based ideas in a fascinating book called Radical Markets, that I hope everyone here will read.
Self-Sovereign Identity. We need to design for the consumer. A self-sovereign ID means you own your own identity, and you manage it. If you move to another country, you include the new details in your overall identity package. Decentralized identity without middlemen is going to be a fundamental pillar of the digital economy. Like Microsoft and the United Nations, we should create programs that support self-sovereign digital identity here in Europe.
Ownership. Many institutions are designed simply to hold things for us, and the law requires them to be middlemen in many transactions. Banks are middlemen for money. Stock brokers and settlement companies are middlemen for securities. Visa, Mastercard, and Western Union are middlemen for the transfer of money. Mortgage services extract rent from mortgage payers. All of these middlemen charge huge fees, yet we now have the technology to own things directly and securely, and payments can be made automatically using software. The problem is that the law doesn’t let us. We need to redesign ownership.
Market design — We need person-to-person markets rather than regulated markets with middlemen. Let’s look at insurance. Insurance companies take money from investors and create insurance products and market and sell them to buyers. Do we really need insurance companies? Instead, we could create a set of contracts that transfer risk and set up an open market for these contracts, so those who want insurance can put their portfolio together by buying many small contracts from potentially many different investors, even buying and selling contracts daily as their needs change. The market will shake out bad actors and clear prices. All the government has to do is enforce contract law and stay out of the insurance business.
Another example is Auctions. Auctions reveal preferences and allocate resources fairly. We auction spectrum. We should auction many more things. That keeps government out of setting prices and lets markets determine the value. For example, governments shouldn’t have cafeterias, they should auction the space every few years and let entrepreneurs compete to serve food. This is far better than a cafeteria run by people who don’t get fired if the food is terrible. There are many more examples where governments can use well-designed auctions to let the private sector compete for their business.
Central Bank digital currency and automated monetary policy. In 50 years, we will have central-bank digital currency. I believe we are on the verge of having the technology to transfer money to a new platform, one that will be cheaper, faster, and more secure. We should commit to central bank digital currency by the year 2025.
Prediction markets. Prediction markets are not recreational gambling. Prediction markets provide real-time information about the future. Yet they are highly regulated and often illegal. We should enable markets to give us accurate predictions, rather than paying experts to get it wrong. We could use a prediction market on GDP growth that would help us set monetary policy automatically using an algorithm, rather than using old survey data and human judgment. Governments should start using Prediction markets immediately to get better information and set policies accordingly.
Personal data. We shouldn’t be regulating third-party handling of personal data. We should be creating a framework that allows people to collect and use their own personal data for their own benefit, on their terms. We should be designing incentives to encourage people to learn to manage their own data and be responsible for that use. We shouldn’t be trusting all our data to large corporations and governments. Today, the Chinese government is already using personal data to censor people, prevent them from getting access to good schools, hotels, airplane tickets, visas, and even dating sites. We must work hard to reverse these trends.
Adaptability. The world is moving faster and faster. Algorithms are already making many of our decisions for us. In the future, algorithms will help us learn what to buy, where to eat, what to learn, what to watch, where to go, whom to meet, how to spend, what not to do, and much more. They will drive us around and take care of our kids. Machine learning, AI, generative adversarial networks, and robotics will accelerate the pace of change even more. The best algorithms will be those that do the most for us with our own data, giving us time to do other things. We will want a free market for algorithms and third parties who can verify that those algorithms are safe. We will need to learn how to govern algorithms.
Mechanisms and incentives, not rules. An example is data markets. We should create markets for all kinds of data, from personal to corporate and industry to government data. Markets will let us exchange value by exchanging data.
Another mechanism is income tax. If we tax income, people will earn less. If we tax spending, people will be incentivized to earn, save, and invest more. Governments can still get the money they need, and people will still buy goods and services, but the incentives will be properly aligned with making money, rather than putting on the brakes. And we will spend far less collecting taxes, because smart contracts can collect them for us. By switching to a consumption tax, we can lower tax-collection expenses by 90 percent.
Simplification. We have to make it profitable to eliminate and reduce the number of words in legislation, in contracts, in regulations. We should focus on higher-level outcomes, rather than processes and paragraphs. We should start making all documents machine readable immediately. Right now there is every incentive to add and no incentive to subtract.
Maximize Sustainable Economic Growth
The purpose of governments in the EU should be to maximize the sustainable rate of economic growth. The difference between 2 percent per year and 3 percent per year compounded over decades is staggering. China has been growing at 9.5 percent for 25 years and will soon be the world’s largest economy. At that rate, in twenty years it will be larger than the rest of the world combined. You don’t have to manage the details if you have a growth rate like that.
To wake up from our long economic nap, I argue that almost all European government officials should be focused on sustainable economic growth of 3 percent per year, not on writing rule books. Every government office should keep that number — the current rate of economic growth for the year, updated every two weeks — in big numbers on the wall. If Europe can grow at 3 percent, we will automatically have better schools, better transportation, better health care, longer lives, cleaner air, more sustainable food and energy, safer cities, and low-income people will enjoy a higher standard of living across the continent. Immigrants are part of this solution. So are the technologies we are here to discuss.
There are risks if we go down this path, but I believe the risks are greater if we don’t. We must take our foot off the brake and embrace new ideas before we embrace new technological solutions. We must learn to think new thoughts. If we do that, we can have the Europe we want for the 21st century.