This past week I have been in Singapore and Hong Kong. They are not perfectly liberal societies by any means. Singapore executes those that traffic drugs but as consolation will let you buy a beer at the corner Seven-11. In Hong Kong you are forced to inhale awful air and the place smells of burnt rubber, they really needs to do something about the pollution (although perhaps it’s blowing in from China and the options are limited). Both places let you ride a push bike without a helmet.
Both of them are very open places in terms of trade and immigration and have very low income taxes (I’ll forgive Singapore it’s 100% tax on cars) and a very favourable overall tax environment for investors. And their labour laws seem much saner than ours. It does not take long to figure out why these places have open economies. They are both city states and excluding imports would mean poverty and misery. Likewise for being unfriendly towards investors. Think how people in Sydney would fare if Sydney tried to restrict the importation of food. I doubt there is any particularily liberal mentality within the mindset of politicians in Singapore or Hong Kong, just political incentives that are different and run of the mill pragmatism. It does suggest to me that if you believe in liberty then smaller nation states are probably a really good idea. If Sydney ceceded from Australia I’m pretty sure it would be a better place.
I’ve also been thinking about federalism more lately. I’ve decided it isn’t such a great idea. In theory a federalist system with a minimalist central government providing freedom of movement and trade between the constituent states, and perhaps a common currency, is a nice ideal but in practice it is never sustainable. The incentives built into a federalist system are to move power to the centre. It happens in every federalist system in the world with Switzerland being perhaps the only example which would allow a credible counter argument. Certainly the USA and Australia have seen a steady march towards centralisation of power over their history. The EU is edging down that path but the centre of that federalist system is thankfully still nice and weak by comparison. Rather than this tendancy towards centralisation being a product of flawed political thinking I believe it is a somewhat inevitable consequence of federalism. The political incentives within a federalist system are to keep the size of state taxes low. So the cental government is where the statists do their work. And so it flows that tax powers will be centralised within a federalist system. About the only way I could see a federalist system being sustainable classical liberal model is if central government was constitutionally prohibited from levying taxes and the barrier to any constitutional amendement was very high. The EU comes very close to such a system, but as can be seen with the proposed debt bailout of Greece, governments are frequently happy to simply ignore constitutions (or in this case treaty agreements). A more solid constitution arrangement would need some mechanism by which citizens could seek personal legal remedy if the government breaches the letter of the agreement. For instance if individual German taxpayers could sue their government for significant punitive damages in the event that Germay bails out Greece then perhaps the system of financial discipline could be defended. Likewise any constitutional attempt to limit central tax powers needs some legal remedy which individual citizens can deploy.
All this implies I can imagine a federalist system that works long term. However in practice even my imagined system is probably too optimistic. It is better to abolish federations and have smaller nations. Abolishing Australia seems like a good place to start. Unfortunately our constitution prohibits it.