Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 30 November 2014

Destroying the state is no accident

In a discussion of George Osborne’s plans for the deficit, I suggested that - if we were to take them seriously - they could only be rationalised as an attempt to fundamentally reduce the size of the state. Chris Dillow, following Rick and Giles, seems to prefer the cock-up theory, whereby the destruction of the state is an accidental result of an obsession with the deficit. I’m afraid they are wrong - this is no accident.

I suspect we would not be having this discussion if we were talking about the US. Indeed, Brad DeLong, in commenting on a different post where I ask why some academics so dislike fiscal stimulus, says I’m trying so hard to be fair that I lose sight of the ball. He asks “how can you not think it is all ideology on the other side ..”. That was a discussion about academics, who you might hope were more objective and less politically strategic than politicians.

So why do I think the sharp reduction in the size of the state in the UK is no accident? The most obvious piece of evidence is how the deficit has been reduced. Osborne originally planned an 80/20 split between cuts in spending and increases in taxes. In practice, as Giles pointed out at the Resolution Foundation’s meeting, deficit reduction has almost all been about spending cuts, with almost nothing net on taxation (largely because of the LibDem inspired increases in the personal allowance). If it really is all just about the deficit, why the imbalance? As one time European Commissioner Olli Rehn put it, in complaining that (initially) France was trying to comply with Eurozone deficit rules by putting up taxes: “Budgetary discipline must come from a reduction in public spending and not from new taxes”.

The argument I use in my earlier post is that there is no sound macroeconomic case for a rapid reduction in the share of debt to GDP at a time when interest rates are still at or near their lower bound and there are risks to the recovery. So, if the macroeconomic argument for deficit reduction is unsound, there has to be another motive. Chris turns that on its head. He says: “whereas the arguments for austerity are plain daft - talk of the "nation's credit card" is sub-literate drivel - arguments for shrinking the state are at least reasonable.” Why use daft arguments rather than reasonable arguments? If they want to reduce the size of the state, why not just argue for that? Why use the deficit as a cover?

Before I answer that, let me raise another question which frequently arises. Why on earth has Ed Balls come to accept the austerity case? As Tony Yates tweeted to him today: “why are you reluctant to point out that we *need* deficit stimulus while monetary policy is limited by the zlb [etc]?” [Subsequent post here.] As Bill Keegan reminds us, this is the same Ed Balls that in 2010, while acknowledging that there should be a deficit reduction plan, said “but only once growth is fully secured and over a markedly longer period than George Osborne is currently planning …Just think if Clement Attlee’s government at the end of the second world war had decided that the first priority was to reduce the debts built up during the war – there would have been no money to fund the creation of the NHS, no money to rebuild the railways and housing destroyed in the blitz, no money to fund the expansion of the welfare state.”

The reason for this about turn is of course mediamacro, which is why I go on about it so much. When the entire media jumps on your leader because he forgot the bit of his speech where he mentions the deficit, as a politician you are bound to conclude that the battle has been lost. It is not that journalists were wrong to point out the omission - the problem was the presumption shared by nearly everyone that this was a gaff because the deficit is in reality all important. And please don’t say politicians who bow to this media pressure ‘lack courage’ - a politician’s job is to win elections.

The cock-up argument could respond that somehow the government has got trapped by its own rhetoric. It used the deficit line as an obvious stick with which to beat the opposition, but it has somehow got out of control. Except of course that Osborne did slow down/stop deficit reduction when it looked like the recovery might not come before the election. He did not feel trapped then.

Chris asks why there has been no media campaign to promote the idea of a smaller state. He writes: “I'd encourage sympathetic journalists - of which Osborne has many - to write about excessive or wasteful spending. I'd commission management consultants and civil servants to show how to improve the efficiency of each government department. And I'd find some economists to show that a smaller state tends to promote growth.” But this misses a key point I have often made about mediamacro. I do not believe (despite what some commentators on my posts imagine) that the media can persuade people of anything. In particular, they would find it very difficult to persuade people we need a smaller state.

As I showed here, seven times as many people want higher taxes and spending than want lower taxes and spending. People like their NHS, they want resources put into state education, and pensions are also popular, which is why these items tend to be protected or ring-fenced. It would be very hard to get traction arguing that we should reduce spending on these items. As Jeremy Warner, assistant editor of the Daily Telegraph, wrote: “The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis. This may be pro-cyclical, but there is never any appetite for it in the good times; it can only be done in the bad.”

While people are clear about their preferences for public goods, they are not experts on macroeconomics. So when they are told that the deficit has to be reduced - painful though that will be - then they think about their own budgets and it makes sense. They remember the Eurozone crisis which involved governments not being able to sell their debt. Media myths have to come from half-truths.

Nor is it the case that the right has not helped prepare the ground for replacing the state with the private sector where it can. The neoliberal line is that the state is always slow and inefficient and the private sector is always dynamic and innovative. It is a meme that is so pervasive that it came as a shock to many when Mariana Mazzucato pointed out how much innovations like the iphone depended on state funded research. Rather than being bureaucratic and conservative, the state was often where the high risk innovation took place. Equally welfare fraud happens and it offends people a lot, but that has been shamelessly exploited in some quarters, a trend encouraged by the Chancellor himself.

The neoliberal force is strong with this government, and I see no reason to believe that does not also apply to their Chancellor and his macroeconomic policy.


38 comments:

  1. Interesting post - thanks.

    But I'm not completely convinced by your survey evidence that the electorate is prepared to pay higher taxes in exchange for better funded public services. The last election in which a major political party made this case was Neil Kinnock's Labour in 1992. The fact that the Labour Party lost that election in otherwise extremely favourable circumstances (recession + incumbent government which had been around for 13 years) led "conventional wisdom" to conclude that higher taxes+ higher public spending was not a vote winner. Of course, there were other things going on then too, but the Tory campaign famously focussed on Labour's "tax bombshell", suggesting that the Tories, at least, believed that this was a weak area for Labour. The survey evidence you present suggests that in 1992 higher taxes and spending should have been a vote winner. I'm therefore disinclined to trust the survey evidence.

    Of course, that was over two decades ago. Perhaps things have changed? Well, fortunately we have another test in six months. The Conservative Party is promising tax cuts (on income); while Labour is promising tax increases (on property and companies and high income people). The fact that the Conservative Party is promising tax cuts means that they will find it much harder to use the deficit as cover as you suggest they have been doing so far.

    So we'll have a much better read of what the electorate really think after May.

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    1. People like government services but they don't want to pay for it. This contradiction drives political ideology. The left promises to provide the services, the right promises lower taxes. I guess the survey can be correct if it didn't specify exactly who pays what. I mean it's the eternal political game, the right just has to ask the left exactly how to pay for a new program. The right has it easy there. But once a program is established, it's hard to get rid of it, that's the advantage of the left. Then the right has to explain why this program is wasteful.

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    2. (same Anon as above)

      perhaps Alexander - but the 1992 Labour manifesto and the 2015 edition had/will have tax rises carefully tailored only to apply to the upper end of the income distribution. So it seemed that in 1992 people didn't choose higher government spending paid for by taxing the rich (perhaps as they believed that the taxes on the rich would be supplemented by taxes on the median household).

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    3. People's views in the 1980s and 1990s were well to the right on the size of the state. Most people today want to renationalise energy companies and the railways, but ironically, no major party (incl UKIP) agrees with this.

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  2. "As I showed here, seven times as many people want higher taxes and spending than want lower taxes and spending."

    Labour comforted itself with precisely this kind of polling return in the 1980s.

    Pollster: "Would you like more money spent on collective goods such as the NHS and education of the young?"
    Polled: "Yes of course"

    Pollster: "Would you like to pay more tax to do so?"
    Polled: "Yes of course."

    What would you expect most people to say? This is a phenomenon recognised in polling everywhere, not just in the UK. Have a guess why it doesn't turn into votes?

    This blog is turning into a trip down memory lane for those of us nostalgic for, say, politics in 1986. I much prefer the economics stuff.

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    1. So you discount what people actually say, but are happy to infer their preferences from one election where people could be voting for all kinds of reasons. I much prefer it when you have something sensible to say.

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    2. If only there were some kind of academic theory about how preferences are revealed by actual behaviour.

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    3. "If only there were some kind of academic theory about how preferences are revealed by actual behaviour."

      That certainly will not be economics, and especially macro-economics. They are trying to microfound the discipline on something quite different.

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  3. I blame Evan Davis. The last time I heard Ed Balls mention anything sensible was when Evan cut him short on the Today prog with " ...yes yes, we know all about that (stimulus), but what about the deficit?"

    Listen to some of Davis' youtube speeches if you want a bit of evidence free liberal opinion.

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    1. Martha Kearney did it to him on The World At One a couple of Thursdays ago. Mr Balls was talking about fiscal stimulus but she cut him off with a claim that it would take years and a demand that he tell her what he would cut.

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    2. I agree Evan Davis says some odd things. He argues that post-industrial Britain is doing well by just visiting a few small scale high tech companies.

      Deindustrialised Britain is not working for a large proportion of the country.

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  4. "Destroying the state" - Hardly, reducing the money spent by the state, clearly. Why the hyperbole?

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  5. “And please don’t say politicians who bow to this media pressure ‘lack courage’ - a politician’s job is to win elections.”

    The politician's job is to try to win elections and I don't see how standing up to the media pressure on this issue would require election risking courage anyway. They have the weight of economic science behind them, don't they?

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  6. Galileo had the weight of Copernican science behind him (a much weightier weight than economic "science").

    It didn't help him when he came up against the media controllers of the day.

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    1. No it didn't. But I think the BBC should've had Evan Davis order Ed Balls to “abandon completely the opinion that the deficit is not the disease and Osbornian austerity not its cure, and henceforth not to hold, teach, or defend it in any way whatever, either orally or in writing.” live on Newsnight rather than just 'show him the instruments' in private.

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  7. Edit:

    In fact I can hear the echo of Jeremy Warner's Vatican-official ancestor coming down the ages.

    "The fact is that you can only shrink the size of the Universe in a heretical frenzy. There's no appetite for it when people are more rational."

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  8. "When the entire media jumps on your leader because he forgot the bit of his speech where he mentions the deficit, as a politician you are bound to conclude that the battle has been lost."

    But per Krugman the Keynesians are winning the argument. He just wrote: "I wasn’t talking about the merits of the Keynesian case, which I believe have always been overwhelming, but about the way macroeconomics is discussed in the media and among VSPs in general. My sense is that this is shifting in a Keynesian direction..."

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  9. I suspect that you are right SW-L; austerity is being used as an excuse to cut the size of the state (and to persecute the resistant poor who are reluctant to work for the crap wages on offer). But is there any academic work on the optimal size of the state, or at least the influences on that?

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  10. It's nice to see that you've come across to what historians' peer-review tells us about the 'Victorian Values' of the Thatcherites - rebadged by Cameron as 'the big society' - that the modern day Tory Party exists only to shrink the size of the state to interwar levels of taxation.

    There is a lovely line in Kishlansky's history of Britain in the seventeenth-century (Penguin) in which he describes John Pym as "leading by seeming to follow." This is what most of the UK media does.

    I hope you have listened to 'Rupert Harrison 15 Mar 2014' on BBC Radio 4 Profile series, still on their website, puffed as:

    "He's George Osborne's top advisor and ahead of the budget Mary Ann Sieghart profiles Rupert Harrison. Some say "he's the most important man you've never heard of" and "the real chancellor". Those who know him well and have seen his influence grow describe his career and characterstics."

    There is also an old one of Crick's BBC blogs, 'An informal job interview in the park' Wednesday, 28 July 2010 on the topic.

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  11. "As I showed here, seven times as many people want higher taxes and spending than want lower taxes and spending."

    And François Hollande and socialists have been elected in France in 2012. And one of the big criticisms they've endured has been the "ras-le-bol fiscal". There's of course a part of ideology in this criticism, coming from the French right, happy to hit on socialists. But there's also a genuine reluctance to pay more taxes from all sides of society. Of course people want better public services, but are they ready to pay more for it?

    In our modern European economies, public expenses are around 50% of the GDP. Ie, half of the economy is socialized in a way or another, at minimum by being collected and redistributed. Can this ratio be really increased and would it be a good thing to increase it? I don't think so. This leaves a lot of place for leftist policies: ensuring efficiency and fairness of this public spending; ensuring a strong struggle against tax evasion by individuals and businesses (a big success of the French socialist govt: more than 1 billion euros per year are being recovered as we talk.)

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  12. One thing I don't understand is why the conservatives just don't cut taxes as stimuli, then no larger state, maybe even a smaller one if tax cuts are hard to repeal, and there is no austerity.

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  13. "Just think if Clement Attlee’s government at the end of the second world war had decided that the first priority was to reduce the debts built up during the war"

    I suppose we might then have started calling the 1940s the years of "austerity". Just rhetoric? Not at all-

    http://www.ukpublicspending.co.uk/ukgs_line.php?title=Total%20Spending&year=1945_1950&sname=&units=p&bar=0&stack=1&size=m&spending0=70.34_64.81_49.06_39.21_36.00_35.89&legend=&source=a_a_a_a_a_a

    The Coalition can only dream of such austerity as Labour were able to impose on Britain in the 1940s, albeit for reasons (balance of payments and satisfying the Americans) that are not relevant today. So this is at best a historical point, I admit.

    Also, how much did the NHS actually cost in the late 1940s? Wasn't it mostly a matter of bringing healthcare under central control (with limited success e.g. Scotland kept its independence on health matters) rather than actually spending more on healthcare? I don't think that it was until the early 1960s that any government actually thought that building more hospitals was necessary. The NHS was motivated by efficiency considerations, not expansionary considerations, as with the rest of Labour's nationalisation programme e.g. publicly owned industries like nationalised steel and coal were intended to be more productive.

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    1. Sorry, that should be this chart-

      http://www.ukpublicspending.co.uk/ukgs_line.php?title=Public%20Net%20Debt&year=1945_1950&sname=&units=p&bar=0&stack=1&size=m&spending0=215.64_237.12_237.94_213.97_197.77_193.89&legend=&source=a_a_a_a_a_a

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    2. Doesn't that chart just show the impact of the post war recession leading to the spike in debt / GDP? And the impact of strong economic growth on net/debt to GDP there after? Managed expenditure fell from '45-47 (as you would expect from disarmament), but rose again '47. Even in '47 it was well in excess of pre-war levels.

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    3. I don't see how pre-war levels of expenditure are relevant in this context. The issue here is whether Attlee et al focused on getting the debts under control. (I assumed that "reducing the debts" is hyperbole, since actually reducing the in absolute terms implies running surpluses and that's not a relevant possibility then or now.) The answer, it appears to me, is "Yes".

      A longer-term debt chart makes the point even more clearly-

      http://www.ukpublicspending.co.uk/ukgs_line.php?title=Public%20Net%20Debt&year=1940_1950&sname=&units=p&bar=0&stack=1&size=m&spending0=109.97_119.79_137.54_156.77_182.34_215.64_237.12_237.94_213.97_197.77_193.89&legend=&source=a_a_a_a_a_a_a_a_a_a_a

      After the build-up of debt in WWII, Labour first stabilised the increase of debt as a percentage of GDP, and then brought it down very rapidly.

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    4. GDP went up by 35% from 1946 to 1950, which would reduce debt.

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    5. The NHS is an interesting case. For about 15years following 1948, expenditure in real terms did not increase very much - if at all. The reason was that the major cause of morbidity was bacterial infectious fevers easily and cheaply treated by new antibiotics. Also surgical procedures in the main were low tech/cost common operations: appendix removal, varicose veins, broken bones etc. However, with the development of new high tech/cost surgical procedures, new ways of treating viral infections, indeed treatments for previously incurable illnesses, costs began to rise as did longevity of the population. Since the NHS is free at the point of delivery, demand is not constrained by price. Instead, it is driven by supply - and the supply is becoming more costly. Despite all politicians knowing that the cost of the NHS has to be constrained, the public will not accept it. In May we will see whether they will pay the increasing costs through increased taxation (mansion tax), I doubt it.

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  14. "It is a meme that is so pervasive that it came as a shock to many when Mariana Mazzucato pointed out how much innovations like the iphone depended on state funded research. "

    Two fairly deep fallacies here. The state funded these technologies because of their military applications. I know that because I was involved in some of the Government funded research, and we were not anticipating commercial use. When commercial use happened, it was because entrepreneurs *recognized* the uses the technologies could be put to, not because Government promoted it. In fact, for several years, advertising was banned from the infant internet, which is not *exactly* how you would promote commercial use.

    A classic example is the internet protocol IP. It was designed to keep military sites connected to one another even during nuclear war, by cleverly maintaining connections and rerouting packets. That happens to match the characteristics you need to run a business. But no one that I know ever said "Hey, and it will be useful in thirty years time for portable phones."

    The second fallacy is in the use of the word "depend". Who can prove that if the military had not put money into developing the IP protocol, private industry would not have? No-one, because it isn't true. Both Digital Equipment and Apple Computer developed their own network protocols running at the same level as IP. Both eventually disappeared, mainly because IP had too big a start and too big an incumbency advantage, but they were both developed with private money.

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    1. I don't think that's the point Jon.

      It's not (necessarily) the role of government to commercialise these developments. But it should be the role of governments to pursue activities that are potentially beneficial.

      Similarly, companies might have eventually brought similar technologies to market, but government action can get it there faster and in a more open way - look at the difference between IP and the WWW and the worlds of Microsoft and Apple that are designed to reap monopolistic profits.

      As Simon says: "The neoliberal line is that the state is always slow and inefficient and the private sector is always dynamic and innovative." Mazzucato demonstrates that this is not the case. Not to the exclusion of the private sector, but to show that states can be effective.

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  15. I've long argued on my own blog (http://voxpoliticalonline.com) that Osborne was following an old policy of - I think, George W Bush's, called Starving the Beast. Basically, he cut taxes for the very rich, used that as an excuse to cut spending and turned a surplus of millions into a deficit of billions in a matter of years. This is while he was a state governor, not as president.

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  16. Your arguments are old Keynesian ones. They were largely undone by a-historical New-classical economics which emphasises incentive effects. They argue that large states undermine incentives and the efficient allocation of resources and the market outsmarts anti-cyclical policy. Sargent is still saying this stuff - look at his current research arguing that the causes of Europe's problems are large welfare states.

    The mistakes Keynesians made, was to create New Keynesianism, welcome micro-foundations and ultimately let the New-Classicals set the agenda and the starting frameworks of analysis. Price rigidity is not the way you should counter the efficient markets hypothesis.

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  17. Simon, I haven't read your piece (because I know what you are going to say,having read you on this topic, and agree with it).

    What I think is going on is that those in power (the 'authorities') have a belief, which is that the state cannot meet is obligations that have been promised to future generations and hence these promises must be broken.

    Of course, they have to do this in a way that does not upset the voters as they need them to keep on paying taxes for the current generation of old people, or buying their houses.

    Thus, the financial crisis has been sized as a pretext to shrink the state-policies, which you have pointed out have no basis in economic terms.

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  18. there is no sound macroeconomic case for a rapid reduction in the share of debt to GDP at a time when interest rates are still at or near their lower bound and there are risks to the recovery. So, if the macroeconomic argument for deficit reduction is unsound, there has to be another motive

    Without a reduction in the deficit the share of debt to GDP will continue to grow. There may be a sound macroeconomic case for this, of course. I wonder what the bond market thinks.

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    1. Eliminating the deficit will reduce share of debt to GDP.

      I think SWL advocates stabilising debt to GDP share (through small deficit).

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    2. Yes, I realise that. But to achieve stable debt to GDP the deficit needs to be reduced (not eliminated).

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  19. The Tories are going to miss their deficit reduction target. This is good news for Labour as the Tories cannot now claim the title as the party of responsible economic management. It is a strategic move of Labour not to campaign on deficit expansion to get the country growing. If they did the Tories would say, "sure we did not meet the target, but at least we are serious about reducing it - Labour want to expand it further!"

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  20. You say in an earlier post,

    "We now know, as a result of the development of New Keynesian economics, that there is no necessary incompatibility between the microfoundations approach and Keynesian ideas. "

    There seems to be a religious zeal and a strong groupthink among the macro-economics establishment that the most important thing is that Keynesian ideas can be "incorporated into the Basic Model." The issue is NOT whether you can have micro-foundations and Keynesian results. The issue is if you are going to incorporate micro-foundations, are the micro-foundations the right ones.

    Firstly they are not what Keynes was talking about. Price rigidity is not the reason you do not get efficient markets and rational actors. It is because markets are IRRATIONAL. Ie, preferences are subject to things like fear, exuberance, groupthink and social context.

    OK, I know what Keynes actually said is not important to you. Let us put this another way. The issue is what are the real reasons why we do not get efficient markets. The answers are not in silly stylised models. You need to pop over to places like your Psychology Department to get closer to the truth.

    Moreover if you are going to convince intelligent people in the media of the case for expansion, you need to get the foundations of your reasoning right. (Some of these people in the Independent and Channel 4 are quite broadly educated and most likely in subjects that do exactly the reverse of what modern economics does). Insisting on micro-founding your analysis with silly stuff will get you nowhere.

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