May 22, 2014, 9:09 PM ETFireside Chat, Interview, Panel, Conference Presentation

The Fourth Revolution: The Global Race to Reinvent the State

The Fourth Revolution: John Micklethwaite and Adrian Wooldridge argue that the West is undergoing a fourth revolution in governance, defined by the need to reinvent the state through efficiency and technology, driven by global competition.
Global Competition: Unlike previous revolutions where the West led unilaterally, this era involves active competition with Asia, specifically China, which is deliberately remastering the art of government.
Western Complacency: Western leaders and elites suffer from "virulent apathy" and a belief that the status quo will persist, despite voter fury and the recognition that "we know what to do, but we don't know how to get elected" to do it.
Competitive Threat: China is shifting its focus from studying Western capitalism to studying Western government, viewing the West as a model to be outperformed rather than emulated; they visit Silicon Valley and Wall Street but avoid Washington.

First Revolution (Nation-State): Emerging in the 16th–17th centuries (Thomas Hobbes), this revolution established internal security and order in Europe while maintaining external competition, contrasting with China's inward-looking, non-competitive empire.
Second Revolution (Liberal): Late 18th–19th century revolution characterized by accountability, liberty, and "lean government," exemplified by 19th-century Britain which shrank the state while increasing efficiency by eliminating patronage and rent-seeking.
Third Revolution (Welfare State): Beginning early 20th century, this shift fused compassion and national efficiency to expand the state's role in education, health, and poverty reduction, reaching a zenith with the New Deal and Great Society.
Failed "Half-Revolution": The Reagan-Thatcher era is described as a "half-revolution" because, while it won the rhetorical argument against big government, it failed to significantly reduce state spending; UK welfare spending only dropped from 22.9% to 22.2% of GDP over a decade, and regulation increased in new areas (e.g., occupational licensing).
The "Nanny State" Outcome: The state has evolved into a "nanny state" that both left and right parties support, resulting in excessive spending, intrusion, and a system where "more" has become the dominant political demand.

Herb Stein's Rule: The speakers cite economist Herb Stein's axiom that "if something cannot go on forever, it will stop," pointing to unsustainable sovereign debt and aging populations as forcing factors.
Fiscal Unsustainability: Governments have moved from crisis-driven Keynesian stimulus to permanent annual borrowing; the US has run deficits almost continuously since 1960 (with only five surpluses), and France has run none since 1975.
Technological Productivity: The Information Revolution offers a path to improve service-sector productivity, challenging "Baumol's disease" by allowing high-quality services (education, healthcare) to be delivered more cheaply via the internet (e.g., Khan Academy, telemedicine).
Management Efficiency: The public sector is criticized for remaining stuck in agricultural and industrial models; the speakers point to efficiency innovations in the private sector, such as Singapore's state services, India's low-cost healthcare (e.g., Aravind Eye Hospital performing at 1% of US cost), and Sweden's "welfare entrepreneurship."
Inequality and Legitimacy: Excessive state size fosters dependency and disillusionment, while tax loopholes ($1.3 trillion in the US) often benefit the wealthy rather than the poor, distorting the democratic mandate.

Technocratic Safeguards: The speakers advocate for independent institutions (like central banks or entitlement commissions) to make long-term decisions, shielding them from short-term electoral pressures and "robbing future generations."
Subsidiarity and Choice: Power should be transferred to the lowest effective level (mayors, local districts) and consumers should be empowered through school vouchers and competition, as demonstrated by Sweden's privatization of school and hospital management while maintaining free access.
Contractor-Provider Split: The state should act as a purchaser of services rather than a sole provider, utilizing private sector management techniques (total quality management, lean manufacturing) to improve outcomes without sacrificing public ownership of the goal.
Data Transparency: Publishing performance metrics and results tables is essential to force competition and improvement, allowing voters to see why a district underperforms compared to neighbors.
Democratic Reform: Shrinking the state is framed as necessary to strengthen democracy and liberty, reducing the "tatty" and dysfunctional aspects of current governance that drive voter apathy.

China's Governance Academy: The China Executive Leadership Academy, Pudong (CELAP), trains bureaucrats to study best practices abroad, specifically looking to Singapore, Chile, and Iceland rather than the US.
Authoritarian Efficiency: China and other emerging markets are drawn to the "top-down, state-guided" model because it delivers infrastructure and growth faster than the "lazy, self-indulgent" Western democracies.
Ideological Contest: The 21st-century struggle is not merely economic but ideological; the West risks losing the "values of freedom and liberty" if it fails to demonstrate a functional, efficient government model to the rest of the world.
Demographic Advantage: While the US benefits from younger immigrant populations compared to Europe's aging demographics, the core challenge remains the ability to govern effectively amidst these shifts.

Catalysts for Change: The speakers identify three potential catalysts for the fourth revolution: visionary leadership (like Thatcher or Merkel), fiscal disasters/busts that force reform, and a bottom-up movement driven by local data and comparisons.
US Political Landscape: The speakers predict that political leaders (including Hillary Clinton) will be forced to address inequality and fairness, but that the fundamental constraint of "government cannot grow forever" will remain the defining issue.
Historical Precedent: The speakers note that the West has historically been the "vortex of creativity" and will eventually correct its course, but warns that the current window for reform is closing as China solidifies its alternative model.
Prediction of Success: The speakers argue that democracy will ultimately prevail in the long run, but only if it undergoes a renovation to become smaller, more focused, and more efficient.

Corporate Role: The speakers reject the idea that corporations should run society but support the "purchaser-provider split," where private entities deliver public services under contract (e.g., private management of public hospitals in Sweden).
Education Reform: The speakers advocate for school vouchers and parental choice, criticizing political leaders (like Obama) for protecting monopoly public school systems while sending their own children to private schools.
Net Neutrality: The speakers did not offer a definitive stance but acknowledged the controversy, emphasizing the need for proper analysis of internet regulation.
Tax Loopholes: The speakers highlight that $1.3 trillion in tax exemptions and mortgage interest relief often disproportionately benefits the wealthy, constituting a form of "corporate welfare" and cronyism that must be addressed.