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.