The Growth Trap (Revised)

Every economy, every self-organizing system which is not also self-limiting within the bounds set by its environment, grows until it exceeds the ability of that environment to support and sustain it.  It then collapses. 

The collapse of our global economy can be expected to be catastrophic.

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When an economy first develops, acquiring resources is difficult and expensive. Growth is slow and uncertain, often outstripped by the demands of increasing population.  This is despite the fact that resources are often accessible and plentiful.  The methods of extracting the resources are primitive and inefficient, and there is little surplus.  The demand for and uses for new resources are limited, and efforts at developing new resources are often desultory. This state of affairs, essentially one of economic stagnation while surrounded by plenty, can often last a long time.

Note that there is a maximum benefit to any resource, and the costs of development, extraction, and conversion of that resource to useful form must be subtracted from that maximum benefit. Ideally, the remainder is what is available for use by the rest of the economy, though more often an economy is incapable of extracting the maximum benefit from any resource. There is almost always some degree of inefficiency of use of any resource by an economy and in primitive economies, this inefficiency is very high.

However, as infrastructure is invested in and developed, the relative cost of acquiring and developing resources decreases.  More uses are found for extracted resources, providing motive for ever greater extraction. Since it is easier and cheaper to develop uses for resources, rather than new sources of resources, demand, in general, outstrips supply, keeping the profit margins of producers high. For the producers, this extra profit means more resources are available to invest in expanding extraction and distribution, thus increasing the supply of these extracted resources available to be put to other uses in the economy.   

With the initiation of growth, the economy is able to exploit resources at an accelerating rate.   The economy grows further.  At this stage, the limiting factor no longer is the costs of extraction, but the limitations in demand, which are the final uses for the resources, and the necessary distribution systems, which also must be developed.

So it is necessary to develop an infrastructure, in order to extract, distribute and employ the resources, There is a cost, in resources consumed, to developing this infrastructure, There is also a cost to maintaining this infrastructure, and finally there is a cost to operating this infrastructure.

Since these costs are low, when resources are still plentiful and cheap to extract, the infrastructure grows robustly, This has the consequence that the early infrastructure maintenance systems will not be designed for efficient use of resources.   And this has consequence when resources later become expensive.

For clearly, however, with finite resources, or a finite average density of resources, or even with a finite rate of renewal of resources, the availability of  resources limits any economy’s ability to grow.  And this first shows up as resources become more expensive to find, to extract, and to distribute.

Indeed, as the plentiful and inexpensive resources are consumed, the exploitation of ever more marginal resources, resources which are more costly to extract and process, which are more distant and difficult to transport, becomes necessary to expand and even just to sustain the economy.  And the infrastructure must be expanded to develop these resources, and at an increasing cost.  What is more, this increasing cost of extraction must be passed on, and this increases the maintenance and operating costs of the entire infrastructure, including that already developed and designed around a low cost of resources in order to be efficiently maintained and operated. This older infrastructure becomes disproportionately costly and inefficient to operate when resources are more costly.

So less and fewer resources are available for expansion of that infrastructure.

Eventually, as the availability of resources decreases, and their cost of extraction increases, the cost in resources necessary to develop new infrastructure, and more importantly, the cost in resources necessary to maintain and operate  the infrastructure already built, exceeds the ability of the economy to extract benefits from those resources.

Increasingly, maintenance will be sacrificed to cover the increasing costs of operation. The system will no longer be covering its fixed costs, but only its variable costs. The result will eventually be a stage where the infrastructure can no longer be maintained, when the maintenance budget passes below a critical threshold, but will be subject to increasing catastrophic failure. This threshold is roughly when the budget is no longer able to cover both preventative maintenance and essential repairs. With inadequate preventative maintenance, essential repairs will increase, eating into the budget for preventative maintenance. As the budget for preventative maintenance decreases, the need for essential repairs will increase, in a vicious spiral. This process is sped by increasing costs of operation as a result of the increasing cost of acquiring resources, which the declining quality of the infrastructure also aggravates.

The real increasing costs of maintaining the real economy, (and in particular its infrastructure,) and the increasing real costs of its extraction of real resources from the natural environment, are hidden by the mechanisms of externalization of costs.

In an economy there are many mechanisms for externalizing costs, but they fall into the two broad classes of externalizing real costs, and of externalizing financial costs.  Externalizing financial costs does not alter the real costs of extraction and distribution.  By financial manipulation, these real costs are not reduced, but merely redistributed throughout the rest of the economy, the point being that the extractive industry will appear to be making more of a monetary profit than it really is.  The industry may actually be losing money.  But the appearance of profit leads to the real economy appearing to be gaining greater benefit from the extractive process than it really is.  Real costs appear lower, because financial costs appear lower.   But the financial costs to some of the other sectors of the economy become higher, though, because they must absorb some of the real costs of extraction.  Somebody must pay, and if not the extractive industries themselves, then it must be somebody else.  And all together, the real cost is greater, because resources are consumed in the economically empty endeavor of externalizing costs.

On the other hand, the externalization of real costs does permit the current extraction of resources at a present day lower real cost.  

So two ways of externalizing real costs are pollution and the over exploitation of a renewable resources.  Deferred maintenance is another.  So where externalizing financial costs distributes real costs throughout a present economy, we see that the direct externalization of real costs distributes those costs into the future economy.  Externalized costs distributed over the future also tend to be greater than costs which are internalized in the present.  For one example: The Newfoundland cod fishery:  It collapsed in 1992 due to overfishing, and has yet (2017) to recover.  

 These manipulations of the real economy, as well as the financial manipulations which enable them, enrich the financial and consuming sectors, and impoverish the actual producers of real goods and services.  At this late stage, many productive sectors are deprived of the real resources necessary for them to grow, and ultimately to maintain themselves.

 

For in the case of the modern economy, there are two relevant systems:  The real economy itself, and the financial economy which feeds off the real economy.  The financial economy produces nothing of substance itself. When useful it serves as a multiplier of production, by increasing the efficiency of allocation of resources. If feeds itself, first, however, before the real economy, and when overgrown it diverts more resources to itself than it saves the real economy by that allocation of resources.  The result is a decline in the efficiency of the real economy, and its ability to grow.

 

In any case, this happens at a late stage in the development of the real economy, when the resources available to the real economy to mount opposition to the growth of the financial economy are diverted away. Part of this is the result of increasing real costs in the rest of the economy outlined above.  Part is by the increasing diversion of resources by and to the financial sector itself.  (Inter-sectoral competition for resources is seldom considered by business leaders.)  A point is reached when effective regulation of the financial sector fails.  (One part of this process is that one of the consequences of the increasing concentration of wealth is that the value of non-financial rewards offered by the society declines, and become devalued, reducing the cost of corrupting other institutions.) 

Once the financial economy evades the controls set on it by the real economy, it grows without effective bounds. The financial sector then out-competes the real economy for money.  The financial sector is designed around the acquiring of money, and, unregulated, is simply more efficient at this than any sector of the real economy.

Feeding off the real economy, finance is also a non-self-limiting, self-organizing system.. It too is subject to overgrowth and collapse.  This happens when it exceeds the ability of the real economy to support it. When this occurs, if and only if it occurs before a critical point in the growth of the real economy, the real economy may yet be saved.  This is not because the real economy is self-limiting.  It is only because it has been increasingly organized to service the financial economy, and with the collapse of the financial economy, the real economy may be reorganized into a self-limiting form.  This is not guaranteed.  This may not even be likely.  In 2008, the opportunity for such reorganization arose, and was missed.   And whether or not the real economy can still be saved still depends on whether or not it is already too big to be reorganized into a sustainable form.  (It should be mentioned that capitalism, per se, is organized around efficiency, not sustainability.)

With the financial economy in ascendant, money is pumped out of the real economy almost as fast as government spending can pump it in.  This severely reduces the profit margins of productive industries.  Producers in the real economy would be hurt two ways.  Because of lags in production, prices of final goods are reduced vis a vis the prices of the factors which went into them.  And because of the money diverted into finance, prices for those final goods are also diminished.

Because of the diversion of money to the financial economy, the quantity of various forms of money in the financial economy increases.  This is accompanied by ever greater concentration of wealth.  While all assets become overvalued, consuming assets, in particular the assets of producers of toys for the wealthy, gain the highest profit margins, and so gain the highest valuation. At the same time, the assets of more basic industries, caught between rising costs and more limited demand, have lower profits, and thus a lower increase in value. 

This growth is in the demand, or consuming side of the economy, which conceals a relative decline in the extracting and manufacturing sectors.  GDP, for instance, does not distinguish between growth in basic industries, whose value added is underpriced, and growth in consuming sectors such as retail (High and low end retail.  Retail oriented toward the middle and working classes, as these are the classes from which the wealthy can most efficiently extract money, does not do as well.) and, increasingly, finance.  The economy becomes increasingly skewed, away from production and towards consumption.

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This financial extraction becomes ever more difficult and costly, as the real economy becomes progressively impoverished and less productive.  The concentration and availability of extractable community assets also declines.  These assets, historically, because of their low potential for profits, were unattractive to private enterprise, and government was virtually compelled to assume these responsibilities.  Public services become attractive to private monies only due to the combination of being cheaply acquirable capital, the dearth of alternative investment opportunities, and, because of the increasing inability of the undercapitalized public sector to defend itself, opportunities for graft.

This decline in efficiency of financial extraction, means more labor is required for the financial sector to extract wealth from the real economy. Thus, even though most labor is no longer involved in real extraction and production, there results the paradox of an increasing burden on labor in non-productive jobs. This is obscured by the fact that these financial costs are increasingly externalized onto the real economy, ie absorbed by non-financial industries and labor . However, because of the decreasing efficiency, the profit to be made off these jobs is very low, and decreasing, and the pay must be commensurate. 

Meanwhile, since the cost of all maintenance increases, the cost of maintaining the burden of the financial and consuming sectors is also increasing;   the costs required for extraction increase, the actual financial profits decline to zero and even go negative.

The degree of financial exploitation is not reduced, but more resources are devoted to the process.  Even as this happens, fewer resources are available to the real economy. This is both because the financial sector externalizes its costs onto it onto the real economy, (and thus appearing artificially profitable,) and because greater real resources must be expended in acquiring resources from an increasingly impoverished natural environment. 

Combined, these processes render the usual indicators of economic health and prosperity at least useless and even more likely misleading. Much growth occurs in the wrong sectors, and is indicative of impending failure, rather than success. Further, with increasing deregulation, more fraud may be expected, both in production, and in reporting on that production, further corrupting indicators.

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Mankind has yet to develop a modern, self-limiting economy. Hunter-gatherer societies existed in ecological equilibrium with their environment, fitting into the limits set by the rate of replenishment of renewable resources.  For pre-industrial economies, the growth trap must be considered as a possible factor in their ultimate decline. Since economies ultimately serve a population, clearly, with unrestricted population growth, no self-limiting economy is possible.  And any non-self-limiting economy will be subject to the growth trap.

More to the present, however, there is no evidence that capitalism is self-limiting.  Indeed, the virtue of Capitalism is efficiency, not sustainability.  Because of its inherent drive for efficiency, it is able to out-compete any sustainable system, and destroy it.  It even out-competes those sustainable systems it depends on, and destroys those.

Only a self-limiting economy can survive the growth trap.  Only an economy which can limit its consumption of renewable resources to some rate less than the rate those resources are renewed, and its consumption of non-renewable resources to some rate less than those resources can be recycled, can be indefinitely sustained.  All other economies will fail. And a failing economy will be incapable of providing sufficient resources for the survival of most of its members.  Indeed, because of the enormous efficiencies brought about by a modern economy, if that economy fails, such a failure will be catastrophic, and only small percentage of the people who depend on that economy can be expected to survive.

There still seems a choice, however, although, judging from their antics, our political class seems either incapable of or uninterested in confronting the issue.

Revised and expanded Sep 7,2016, Nov7, 2016, Feb 17, 2017, May15, 2017

Hidden Benefits of Taxes

Hidden Benefits of Taxes  A revision of the Social Benefits of taxation                                   

A large tax wedge can lead to a dramatic increase in economic efficiency. The market share of 'deadweight loss' produced by a tax wedge consists of inefficient producers and indifferent consumers.  The high costs in resources involved in production of the relatively small quantity of 'deadweight loss benefits' can be much more efficiently applied elsewhere in an economy.  Because of this increase in efficiency, we find a substantial government sector and its services may be maintained with very little net cost to a society.

Historically, taxes have been considered to be a burden on the productive capacity of an economy.  Many of us have at least little bit of a feeling that they’d be better off without them.  Even critical services such as police and fire protection are suspect expenditures to some. Spending tax money on infrastructure, like roads, public water supplies, in some countries health care and retirement, some claim to be an imposition on their liberty.  Some say all taxation is theft. We will not arguer these philosophical points, we will merely argue that an economy, a society, is materially better off with taxes, almost irrespective of what those taxes are spent on.  This is because some of the most important benefits of taxes are not in what they provide, but in how they can shape an economy. Here they can provide a massive increase in economic efficiency, a much higher amount of goods and services for a given amount of resources consumed.

Let us look the standard Econ 101 supply and demand diagram of a free market, and see what happens when we impose a tax.  We will look at the market for that commodity familiar to economics students everywhere: Widgets. Sure, it could be  a market in anything, but most markets have unique characteristics, and we want to talk generalities.  So we’ll use widgets.

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In a supply and demand diagram for the market of widgets, the quantity of  widgets bought and sold is plotted against the price.  The more money is offered for widgets, the more producers are willing and able to make, so the supply curve slopes upward.  The demand curve slopes downward because the higher the price for widgets, the fewer widgets consumers are willing to buy.  Where they come together  (at the equilibrium point e)  is that price where consumers are willing to buy as many widgets as producers are willing to make and sell.

The green and blue triangles are the benefits (welfare) society gets from widget production. The benefits are divided between the producers and the consumers.  The blue is what the producer gains from producing widgets.  This includes his profits. The green is the net benefits consumers get from using their widgets. Not all consumers derive the same benefits.  Some need their widgets more.  Some may just have more fun with them.

The price is the market price, and is the same for all producers and consumers.  The quantity of widgets produced, and the price they are sold at on the market, are determined from where the supply and demand curves come together.  (At e.) Looking at the diagram, we see the widget producers on the left are able produce at a lower cost than producers on the right, so they are able to make higher profits.  They get more benefits than the less efficient, more marginal producers.  Similarly, the consumers on the left get more benefit from the use of the widgets they buy. This is shown by their willingness to pay a higher price along the demand curve.  The difference between what they are willing to pay for widgets and what they actually have to pay is the net benefit they derive from what they are buying.

To the right of the equilibrium point, the cost to producers for making widgets is greater than consumers are willing to pay for widgets.  The cost of production per widget goes up, but with more widgets produced than consumers are willing to pay so high a price for, the price goes down.  So producers don’t make more than quantity Q  widgets, because consumers won’t buy more than Q at that price. 

So what  happens when we put a tax on widgets?  Here we put a production tax T on every widget.  This results in a price difference between P’, the price consumers pay, and  P*, the price producers collect, on every widget produced. This is called a tax wedge.  It effectively increases the cost of production for widgets.  So it shifts the supply curve up by that amount, as shown in the following diagram.

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Since the  price P’ paid by consumers is higher, they don’t want to buy as many widgets as before. Instead of wanting to buy Q widgets at price P, at the higher price P’ they only want to by Q’ widgets.  Meanwhile, at the quantity Q’ of widgets that consumers want to buy, producers can only receive P*.  The difference between the prices P’ – P*, times the quantity Q’ produced and sold, is the revenue received by the government.  So we have three regions of benefits, Producer Welfare and Consumer Welfare are both reduced.  Much of this welfare lost by consumers and producers goes instead as Government Welfare.  For their loss in taxes, consumers and producers gain the benefit of government services. The remainder is the region of deferred welfare, benefits which society does not receive, because the tax makes the production of more than Q’ widgets unprofitable to producers, and too expensive for consumers. So the combined benefits to society with the tax are less than the benefits which accrue to society without the tax.

However, this region of lost benefits, the region of so called ‘deadweight loss due to taxes,’ consists of benefits which are both costly to produce, and therefore of low benefit to producers, and of low benefit to consumers, because the remaining consumers in the market are unwilling to pay much more than what the market price would be without taxation.  In fact, with taxation, they are unwilling to pay the price for widgets at all.  They just don’t want widgets that badly. The resources spent in producing these small benefits, now, could be more efficiently spent elsewhere in the economy, as we show in the next diagram.

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Here, in Market W,  S’ is the new Supply curve brought about with the increase in costs imposed on widget producers from taxation.  The marginal benefits (green striped triangles) otherwise attained by marginal producers at higher cost are forgone, the resources which would have been spent to obtain those marginal benefits are instead available, and here allocated, to be expended more efficiently in Market T of the economy, the market for thingbobs,.  Market T can be similarly taxed, the resources applied still elsewhere in the economy. Eventually, of course, the entire economy is made more efficient, as a portion of the otherwise inefficiently used resources in other markets are distributed to other markets, are some even eventually returned to more efficient use in the markets for widgets and thingbobs.  

Now the freed resources are not actually re-allocated by government.  Private enterprises, rather than trying to inefficiently compete in an unprofitable market, simply choose to place their resources in other markets where they can be used more efficiently.  One can argue, of course, that they should do this anyway.  But it is simply the fact that every market has marginal and inefficient producers, trying to make a dollar.  The tax provides them with additional incentive to enter markets where their use of resources will be more socially efficient, where for lesser cost they provide greater welfare.

To be sure, the difference is harvested by the government. And if we examine the diagram with two markets, we see that the net benefits to the private sector are smaller, with the tax, by about the welfare society would gain from the inefficient producers.  The diagrams are generic, and results will vary.  However, in the example sketched, with a tax wedge in place transforming the inefficient producers in one market into efficient producers in another, for the same cost, society gains government welfare in amount about 4 times the total welfare provided by the inefficient producers. (The direct gains in government welfare from taxing widgets replaces some of the welfare society would gain if the market in widgets were untaxed. So, for the cost of expensively produced widgets, we gain efficiently produced thingbobs, and a total of government services of value more or less equal to the value of the combined social value of the production of both widgets and thingbobs.    .

Under judicious taxation, as a result of this increase in efficiency in the use of resources, most of the services of government can be provided for for free.  That is, resources which would be applied in some inefficient productive process, and so largely wasted, may be applied more efficiently in providing economically useful government services. And many of the services provided by government, by eliminating many of the costs of transaction and overhead that producers would otherwise bear, also act to increase the efficiency of the private productive economy.  Inadequate taxation, and the necessary reduction in economically useful services purchased with these taxes, far from increasing the competitiveness of an economy, decreases it, and nations with an inadequate public sector are at a competitive disadvantage with respect to foreign producers in countries with more robust public sectors. Further, even with the light tax burden, the citizens of countries with small public sectors are less provided for, and are a greater burden to the industry of that country, than countries with a larger government service sector. 

In the example illustrated by the diagram, without taxation the total social welfare is about twice the cost of resources expended. (  The size of the green plus the blue triangles compared to the pink triangle in the first diagram.) With the tax wedge as illustrated, the total social welfare is almost 4 times the real cost to producers.  (The size of the solid green and blue regions in both markets of the previous diagram compared to the solid pink regions.)

Although we have drawn the diagram for two particular and identically composed markets, it is apparent that for a wide variety of supply and demand diagrams, and thus, for a wide variety of economic sectors, the application of a tax wedge will result in a large increase in economic efficiency.

By implication, the opportunity costs of the small amount of marginal benefits forgone are huge. The benefits forgone would be obtained by essentially wasting resources in producing them, and are a small fraction of the benefits produced by allocating these resources more efficiently.  Indeed, we may expect this improvement to be even better than it initially appears, since we would expect the most marginal producers to be those most eager to externalize their costs in order to remain competitive.  Pressure to externalize costs is thus also reduced on the more efficient producers. The economic results from failing to apply a tax wedge in a market are, apparently without exception, far inferior

The very pejorative “deadweight loss,” has been used by those ideologically opposed to government intervention in an economy as a justification for their position. However, they, and the economics profession as a whole, have totally over-looked the high opportunity costs involved in the creation of these marginal benefits.  Taking these costs into consideration inverts the conclusion:  The gain in freed resources, in almost any reasonable scenario, far outweighs any gain involved in wastefully spending these resources for these relatively small benefits.  Indeed, in the scale of economic activity, these resources are much more wisely spent elsewhere.  And the tax wedge causes this to happen.  Far from being a burden, taxation in a market, and at what is traditionally considered a rather high level of taxation, can yield much closer to optimal economic results. .

I leave it to those ideologically opposed to government intervention to find exceptions to the tax wedge increasing efficiency. I do observe that the apparent requirement for monotonicity in the supply and demand curves would seem to make finding these exceptions difficult. 

One interesting argument, though, which remains, is the argument from liberty.  This argument would seem to suggest that the wanton destruction of scarce resources is, somehow, ‘liberating.’ And indeed, acquiring the ability to squander society’s resources seems to be one of the primary motives for becoming wealthy, and indeed the ability, and under capitalism the right, to squander society’s resources is the very defining characteristic of wealth. And this would seem, for example, to be the argument against higher gasoline taxes in the United States. The case shown here is that a higher gasoline tax, even with money spent (more efficiently) on public transit, would free up resources for everyone, as the European experience seems to show.  To be sure, there would be less joyriding, and tickets to NASCAR events might become more expensive.

There does remain the issue of determining the balance between efficiency and quantity of production in any particular market required for the proper functioning of an economy.  Considerations of scale indicate that, contrary to what is shown in the diagrams, the first unit of anything is seldom the most efficiently produced.  Rather, there is an optimum scale of production, that which minimizes the average cost, (This ignores issues of demand, and thus actual profit.) and we must consider this to be true for an entire economy as well as for a particular production process.  While with this consideration the improvement in economic efficiency would not be as great, it must still be expected to be impressive.

Also, it should be easier to tax economic wants as opposed to economic needs.  (Although see problem three, below.) A more efficient economy, however, needs less to sustain its function, and so has relatively more resources available for the servicing of wants. 

 “Deadweight loss” is also found in other market situations.  Regulated markets, markets with price controls, and markets restricted by private actions such as monopoly formation and oligopoly usually also involve deadweight loss. Increases in efficiency should also be expected in these situations, so It would seem that these other situations also, at the least, need to be re-examined.

Now direct consumer benefits per se are also much less under taxation, the same as under monopoly, and the producer surplus is also much less. However, the government spreads much of its income widely. It is, in its way, both a consumer and a producer. It re-distributes consumption, and capitalizes production, both directly, through capital investments, and indirectly, through subsidy of production, and creation and maintenance of infrastructure. And all of its expenditure, purported to be for the public benefit, does, one way or another, enrich the diverse sectors of the economy.

One problem with the tax wedge, however, because it favors the more efficient producers, it also favors the economic drift toward concentration of ownership, and the creation of oligopolies and eventually monopolies.  We will address this issue here shortly.

Narrowly held monopolies cannot be expected to spread their profits.  Neither can monopolists be expected to spend their profits to provide services which increase the efficiency of the larger economy.   Monopolies once formed, and where not widely owned, further to aggravate the natural tendency of economies to concentrate wealth and power, a concentration which leads to economic instability and collapse. This is especially so because the power concentrated in monopolies tends to translate into political power.  And the monopolist must be expected to use this power to further his power, and mitigate the impact of a tax wedge on his revenue. 

A second problem is that producers which escape taxation will eventually displace those producers which are subject to taxation. The result will be a reduction in both taxes collected and in economic efficiency.  This problem must be considered especially acute in open economies, where tax paying domestic producers can be expected to be displaced by non-taxpaying (and these producers which can often be less efficient) foreign ones The interesting implication here is that, while a nation’s economy may be producing less and consuming more, as an increased share of what is consumed is imported, (much of what is considered production actually either enables consumption, or is a form of consumption,) that economy need not be any better off for this increase in consumption.  Because of the decrease in economic efficiency, fewer consumables will be efficiently used, and more of this consumption will be squandered.  A country running a deficit is essentially externalizing costs, and these costs may in reality be greater to the country than if the country were to internalize them.

A third problem is, of course, the politics of taxation.  Nobody likes to be taxed, and the powerful, more than others, are capable of avoiding it. (This also bears on the second problem.) This first suggests that the markets which serve the wealthy will be the least efficient, even though these are the markets where an economy can most easily bear the loss of marginal producers.  (Marginal producers may be needed in the production of an economy’s necessities.)  And this further suggests that a disproportionate share of an economy will be dedicated to servicing the wealthy, even at the expenses of the necessities of that economy, such as maintenance of infrastructure.  For instance, a recent study has shown that in the United States today, essentially no policies are enacted by the government which are not also approved by the wealthy elite.  An implication of this is that the tax burden upon this elite can only be expected to diminish, and thus that the burden of taxation on the rest of economy and the population can only increase.

One final note.  As an economy increases in efficiency, it inherently becomes less stable, and more vulnerable to collapse. An efficient economy becomes dependent on its efficiency in order to be productive enough to sustain itself.  The greater the efficiency, the greater its dependence.  A reduction in efficiency will result in a reduction of production, perhaps sufficient enough that that economy can no longer sustain itself. 

A particular consideration regarding improvements in efficiency brought about by regulation and a tax wedge, where a wedge and/or regulation is already established, is that removing or even merely reducing these factors will result in a reduction of that efficiency, and a resulting reduction in the productive capacity of that economy.  That economy may no longer be able to sustain itself. With a critical reduction in production, cascades may result, and the possibility of sectoral and even general collapse.  Great care, therefore, should be exercised in the reduction of the size of tax wedges, or the elimination or alteration of any significant regulation. 

Given the tightly coupled world economy, the efficiency of production of any  major economy is a concern for all other nations.