Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 7 December 2014

The imaginary world of small state people

“In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.”

So said Jeremy Warner (assistant editor of the UK’s Daily Telegraph) last year. Jeremy is a small state person, and I think many other small state people think like this. But the statement is wrong. There are a large number of people - I suspect the vast majority - who do not have any prior view about the size of the state.

In many ways the bipolar view harks back to a bygone age, where - at least in Europe - there actually was a large constituency on the left that wanted a large state as a matter of principle. In the UK that constituency lost all its influence with Margaret Thatcher and New Labour, and it has also lost its influence in the rest of Europe. However this decline in the influence of big state people on the left was matched by a rise to power on the right of those who want a small state as a matter of principle. George Osborne’s plan for the UK over the next few years is the apotheosis of this neoliberal view.

I think I’m like the majority of people in not having any fixed ideological position about whether the state should be large or small. The state is clearly good at doing some things, and bad at doing others. In between there is a large and diverse set of activities which may or may not be better achieved through state direction or control, and they really need to be looked at item by item on their merits.

My first major problem with small state people is that they are not prepared to look at these items on their merits. Instead they have a blanket ideological distaste for all things to do with government. The evidence that government is ‘always the problem’ is just not there. The idea that private sector activity is always welfare enhancing and is best left alone was blown out of the water by the financial crisis. My second major difficulty with many small state people, like George Osborne, is that they are using fear of a debt crisis (a possibility which for the UK and US is non-existent) to achieve their ends. This is political deceit on a grand scale. My third major problem follows from the second: reducing government spending during a liquidity trap recession does real harm. It wastes resources on a huge scale.

For the UK, the OBR estimates - conservatively - that austerity reduced GDP by 1% in 2010/11, and by a further 1% in 2011/12, so GDP was 2% below what it could have been in 2011/12. As there has been no offsetting fiscal stimulus in later years, and because monetary policy has been constrained by the zero lower bound, this waste of resources will not necessarily be eliminated in subsequent years. So the cumulative cost of 2010 austerity could easily exceed 5% of GDP. That is a colossal sum to waste. The estimated numbers in the Eurozone, where the austerity squeeze continues, are even worse - nearer 10% territory and counting. As I argue in this new short piece for the Economist, the fact that Osborne risks doing the same thing again from 2015 onwards is a sufficient reason not to give him the chance.

Which brings me to a final problem I have with small state people, which is their disregard for the evidence. It is true that most people are bad at acknowledging counter evidence, but those with an ideological conviction are worse than most. A common theme among small state people following Osborne’s Autumn Statement is to ask what all the fuss is about. In his rant at the BBC, Osborne says “I would have thought the BBC would have learned from the last four years that its totally hyperbolic coverage of spending cuts has not been matched by what has actually happened. I had all that when I was interviewed four years ago and has the world fallen in? No it has not.” He remembers it well, because he tried to intimidate the BBC back then as well. The claim of hyperbole is nonsense of course, as Tony Yates sets out, but I want to focus on the ‘world fallen in’ point.

Here is Janan Ganesh in the FT making the same claim in spades:

“[Osborne] has also made the spending cuts he promised without the country turning into a medieval wasteland. This is a deeper intellectual wound to the left than we currently understand; it will change the terms of debate about the proper size of the state long after Mr Osborne has gone.”

With both Osborne and Ganesh the intended meaning is that cuts have been achieved at relatively little cost. They clearly hope this idea will become received wisdom in the media. But is it true? Take the one area that Osborne has earmarked for further cuts: welfare. [1] The argument that the cuts made so far to welfare have been achieved without significant costs flies in the face of the evidence. The number of food banks in the UK has grown massively over the last five years. The Trussell Trust estimate that more than half of their clients were receiving food because of benefit delays, sanctions, and financial difficulties relating to the bedroom tax and abolition of council tax relief. As James Harrison relates in this excellent long article, the government simply denies the evidence. The Economist notes: “Welfare reform was intended to be one of the big achievements of the coalition government. But almost all of the radical ideas promised are turning out to be duds.” These are duds that create real misery. Now maybe this is all just teething problems, but the prima facie evidence is hardly that cuts have been achieved at little cost.

So how can small state people have the audacity to claim otherwise? Perhaps it reflects the power of an ideology that its protagonists want to see no evil. Perhaps it is because those hurt by austerity somehow do not count. But the claim that Osborne’s cuts have been such a success that they will cause a “deeper intellectual wound to the left than we currently understand” is simply delusional. These are fantasy ideas from those living in an imaginary world, while in reality the policies they support do serious harm.


[1] I choose welfare only as an example. It does not appear to be an isolated one. Here is an account of Chris Grayling, prisons and the Howard League, or see Alex Marsh on the UK justice system more generally. Or think of those who suffered from flooding as the government cut back money for flood prevention, while the government still pretends there were no cuts.


55 comments:

  1. What is also missed is the duplicity of their arguments.

    For example, they have introduced the internal market into the NHS, and then complained about the extent and cost of NHS bureaucracy. And they are forever promoting the introduction of means-testing, without acknowledging the bureaucratic cost of those measures.

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  2. «However this decline in the influence of big state people on the left was matched by a rise to power on the right of those who want a small state as a matter of principle.»

    I don't think that they matter, and I strongly suspect that they are insincere that they want «a small state as a matter of principle».

    What I think they really want is smaller downward *redistribution* «as a matter of principle» and having identified the state as the vehicle that delivers downward redistribution, they want a smaller state as a means to achieve the real principle they care about.

    I say this because "small state conservatives" as a rule want a bigger state when it comes to *upward* redistribution. For example for big spending on property protection services (more police, more weapons, ...) and on financial speculation (bigger bailouts, more subsidies to push up house prices) and the comfort of rich voters (higher pensions for old ladies in mansions).

    You can read "small state" conservatives arguing that support of the poor and disabled (but curiously, not the support of older and retired "rich ladies in mansions") should be left to voluntary community contributions collected by charities; but they somehow never argue that sending troops to Iraq should be funded by public voluntary collections too. Which was a tradition in the (even relatively recent) past, where regiments and ships were sometimes funded by private individual donations.

    «the majority of people in not having any fixed ideological position about whether the state should be large or small.»

    The majority of conservatives and liberals like a bigger state when it puts more money in the their pockets, and a smaller state when it prevents them from doing things they like, like spending some their money on their luxuries instead of the poor.

    But the fixed ideological position of conservatives seems to be social darwinism, rather than the size of the state.

    «small state people, like George Osborne,»

    HAHAHAHAHA! Osborne? Why hasn't he privatised immediately the vast chunk of the banking system that the state owns and left those enormous banks paying huge bonuses to their executives to fend off for themselves, like he has done with the disabled and unemployed of the North? Why has he kept introducing vastly expensive new schemes to subsidize house price increases?

    Osborne seems to me a classic "big state for meeeee (and my mates) and small state for theeeee (and other losers)" sort of politician.

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  3. Again, this just won't do.

    If the rhetorical move at the start is not accepted, the rest just doesn't follow.

    So, the claim is that in the modern world (as opposed to the 1970s) there are no ideological believers in a Bigger State for its own sake. The divide it is claimed is between those who believe in a Smaller State for ideological (by which is meant irrational) reasons, and those who have no view one way or the other. Yet again, the divide S W-L perceives is between the ideological right on the one had and the technocratic left. As someone who believes in rule by technocrats (as Philosopher Kings tend to do) he has nothing but scorn for those who take the opposite view.

    Unfortunately, the premise is observably false and so the argument fails. The logical possibilities are that to make things go better the State should be (a) Smaller (b) Larger or (c) It makes no difference. It is no good just asserting that those who believe in option (a) do so for irrational reasons. You need to examine whether there are or are not good reasons for this view. Even if it were true that everyone who adopted option (a) did so for crazy reasons, that would not show that option (a) was wrong.

    Further, it is no good claiming that nobody believes (b) any longer. Yes they do. Lots of the left, exemplified by say Polly Toynbee, believe that the UK should follow the Scandanavian model (or, perhaps more accurately, the model which Scandanavian governments used to follow from the 60s through to the 90s).

    It is perfectly fine to argue, as you do at the end, that things would go better with a larger state (I wholeheartedly agree about the disgrace of foodbanks). Similarly, argue that Mazzucato is right that we should spend lots more on defence (!) because that way we'll get more innovations like the iphone (I don't agree). Argue for these things on their merits. The problem of course is that these arguments are difficult, messy, and contingent.

    Just don't tell me that your side of the argument is the only one with technocratic reason on its side, those who disagree being ideologues who are enemies of reason. That is just the ad hominem fallacy. That is to be as dishonest as Osborne is being in his fiscal projections.

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    1. You really should try and read what I write more carefully. Your second sentence is false. Your third sentence is false. The claim is that some people have an ideological view about the size of the state and some do not. Do you dispute that claim? If not, do you have evidence that Osborne's position, and those who defend him, is not ideological? If so, I suggest you put it forward, rather than trying to distort what I write.

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    2. "Just don't tell me that your side of the argument is the only one with technocratic reason on its side, those who disagree being ideologues who are enemies of reason."

      Of course, and that is where almost all nobel prize winners and the saints (and very technocratic ones) of modern macro and the market efficiency hypothesis (Sargent, Lucas and Prescott) stand.

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    3. Nobody has given right wing ideology more "scientific" legitimacy than the macro-economic profession.

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    4. 1) "The claim is that some people have an ideological view about the size of the state and some do not."

      If that were the claim, then it would be completely trivial. Some people like oranges and some do not. A truism. That wasn't the claim.

      2) "Do you have evidence that Osborne's position, and those who defend him, is not ideological? "

      I don't think you understand what the word 'ideology' means. It is not a 'bad thing' as you seem to think.

      An ideology is a comprehensive normative system. It isn't irrational for a government to be conducted on an ideological basis, indeed it is arguably better for it to do so as it will lead to coherent government with an end in view.

      There are, of course, bad ideologies (eg fascism) but to claim (as you seem to do) that an ideology is ipso facto a Very Bad Thing is daft. Are we really going to have to (re-)assess every single decision we take on a case by case basis?

      Liberalism is an ideology. Do you not subscribe to it (in any form)?

      What I think you (wrongly) mean by ideological (although I may be wrong) is that they are doing it for no rational reason other than belief, such as the worshippers of a God who insist on the removal of headgear in a religious building. Do I think Osborne's policies are 'ideological' in that (mistaken) sense? No of course not. He just has a different view on what will make the world a better place than you do.

      Perhaps you (wrongly) mean by 'ideological' that it is not based upon evidence? An ideology that was pursued without regard to the facts in the world would indeed be a Bad Thing. However, without some kind of normative view as to what it is that you are trying to achieve, it is not possible to make any decision based upon the facts alone. Osborne's abandonment of fiscal tightening in 2011 is rather good evidence that he does take decisions with regard to the evidence I'd have thought.

      3) If you think my claim in the second sentence, that if the premise of an argument is wrong then the conclusion doesn't follow, is 'false', then I think you have a confused understanding of how arguments work.

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    5. So now you are telling me what my claims are, and that I do not know what certain words mean. I give up!

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    6. what is usually meant by ideological is that ideas are believed contra evidence, ie that GB's economy did better due to the austerity program. You can believe in a small state and still accept evidence, but those states rarely are co-joined.

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    7. "what is usually meant by ideological is that ideas are believed contra evidence"

      That isn't the dictionary definition of 'ideological' of course.

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    8. of course, hugo, and not all ideologies are equally susceptible to freedom from empirical testing.

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    9. SWL is saying that people on the right often argue for a smaller state as an end in itself (eg Warner), but on the left you rarely hear the equivalent argument for a larger state as an end in itself. When you ask him to "examine whether there are or are not good reasons for this view" (being a small-state person) you're missing his point.

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    10. SpinningHugo - I think your suggestion that your ideological comparisons are correct here. When people like me on the soft left want to expand the state, we have specific expansions in mind. I would like to see free childcare, free University Tuition, a national care service and more resources for the NHS. In order to achieve said things the state would need to expand, but this expansion is driven by a belief about the distribution of service provision, not a belief that a larger state is good for it's own sake.

      It's quite possible that Osborne et al do have beliefs about service provision and distribution related to a smaller state, but they are not explicit about what they are. I suspect that the electorate would not find those beliefs all that palatable if expressed that explicitly.

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    11. SpinningHugo, you are so set on combat that you miss the arguments being made. The point is that Osborne pursues GDP-harming austerity against the evidence, and uses small state for small states sake type of excuses to continue doing that harm.

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    12. Andreas Paterson, in fairness it seems that a lot of self-proclaimed small staters in practice also have specific contractions in mind: transfers, public goods. But they're not as keen on cutting state military spendings.

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    13. SpinningHugo is a neat example of the neoliberal small state folks Simon writes about. He is not just oblivious to evidence but oblivious to the very article he responds to.

      There simply are no significant amount of people who want a larger state in general, not even among radical leftwingers. Their most radical idea is a basic income, an idea Friedman had!

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  4. «the fixed ideological position of conservatives seems to be social darwinism,»

    BTW it is a somewhat impure version of it, in both the UK and the USA; the conservative idea in both countries is that the "best and brightest" *must* be assured success, not that those who succeed are presumably the "best and brightest".

    Put another way, the social darwinism of the USA and UK elites is that their members, usually identifiable by their having been "refined" at Groton and Eton, or Yale and Cambridge, *must* win, or else the system is broken or "biased" and has to be fixed.

    Ans if takes a few trillion dollars or a few billion pounds of bailout and never-never loans to ensure that the "best and brightest" keep their 7-8 figure "compensations", that's just their right for being "best and brightest".

    That's "small state conservativism" too as practiced by the Osbornes of the Anglo-American culture countries.

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    1. '..the conservative idea in both countries is that the "best and brightest" *must* be assured success, not that those who succeed are presumably the "best and brightest".'

      I can't speak for the UK, but here in the US, the latter is absolutely the position held by those who self-identify as "Conservatives". Those with wealth self-evidently deserve that wealth; those without self-evidently don't. Those who succeed are, by definition, the 'best and brightest', not to mention being the ones who have the moral purity and strength of character to deserve that success. It's all post-hoc rationalization that pleases the egos of themselves and those upon whom they obsequiously fawn.

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  5. the left, exemplified by say Polly Toynbee, believe that the UK should follow the Scandanavian model (or, perhaps more accurately, the model which Scandanavian governments used to follow from the 60s through to the 90s). It is perfectly fine to argue, as you do at the end, that things would go better with a larger state (I wholeheartedly agree about the disgrace of foodbanks)»

    But that is arguing for down downwards redistribution, not for a bigger state as such.

    Would you argue for a bigger state that took more money from the poor to add it to the bonus pools of the City to reward them some more for their awesome wealth creation?

    The confusion between "bigger state" and "downwards redistribution" is a favourite tool of the right, it is framing the issue in terms of "liberty" instead of social insurance, and I am amazed that you (and SWL) support that tendentious framing.

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    1. "The confusion between "bigger state" and "downwards redistribution" is a favourite tool of the right, it is framing the issue in terms of "liberty" instead of social insurance, and I am amazed that you (and SWL) support that tendentious framing."

      Good point. Though the term "redistribution" is also a part of the right wing meme arsenal. The term projects the market distribution as somehow more default, something that we actively have to intervene with to move from. But in fact the so called market distribution is necessarily also a matter of intense state activity, for example in policing state set property right rules. The market distribution and the distribution of transfers and public good production are all primary components of the social distribution. None of them has a more fundamental or default status than the others.

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  6. The first few paragraphs describe something that I strongly believe in. The issue of whether or not the state is 'too big' should be decided on a case-by-case basis where you weigh the benefits of a proposed tax cut or increase against the cost of removing or adding a specific government program (or subsidy etc). It is truly baffling when people write that the state is oversized because government expenditures are of a certain percentage compared to GDP. The only question that should matter is if the benefit from the 'least useful' gov. program is smaller than the cost of the taxes required for it.

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  7. If you remember Iain Duncan Smith attacked the coverage of his welfare policies at the BBC in a Daily Mail interview ('BBC host accused of 'peeing all over British industry': IDS fury at 'carping and moaning' broadcaster as report casts doubt on jobs boost - Simon Walters, Mail on Sunday, 18 August 2012).

    Aside from the cloacal propensities of the man, it spoke also to that aggressive culture that this sort of Manichean viewpoint gives rise to and encourages, and it is no wonder the Tories hid most of their oddballs during the election campaign of 2010.




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  8. «HAHAHAHAHA! Osborne? Why hasn't he privatised immediately the vast chunk of the banking system that the state owns»

    In case anybody forgot, the "hard-left communist" :-) Brown government "confiscated" the "commanding heights" of UK finance, a massive nationalization increasing the size of the state dramatically, and the "fellow travelers" CBI plus the Conservatives and the LibDems cheered on and kept them as a large new extensions of the "small state" they love!

    And now The Daily Telegraph is proud to report that "small state" Osborne has decided to intervene directly in the financial markets by offering limited quantities, and targeted at Tory voters, of high-yield bonds:

    «You’ve planned your retirement, you’ve planned a level of income based on savings and on interest and then suddenly interest rates are at a completely historically unprecedented level. And there’s nothing you can do about it.

    “That is why the government has stepped in.”

    The pensioner bonds, first announced in the Budget in March, will be available to buy in January and will operate as one-year and three-year fixed term investments. Some 11 million savers over the age of 65 will be eligible to invest up to £10,000 in both the one and three year bonds.

    But the Treasury has capped the total savings pot at £10 billion. Once this level of investments has been reached, no further bonds will be sold.»

    £10 billion a year throwing off 3.5% of extra interest, that's a nice £350m a year of "small state" handouts to add to "Help-to-Buy" handouts and to "Right-to-Buy" 70% discounts, and Cameron's "Money is no object" when it goes to petty speculators who bought floodplain land for residential houses.

    So "that is why the government has stepped in" is what "small state" means! :-)

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  9. Osborne and Ganesh claim that someone somewhere said Osborne's earlier cuts would have catastrophic consequences. I think a good rule of order is to always ask for names and citations of specific people. No doubt someone said that the end was nigh in 2010, someone somewhere (often, I think in the speaker's corner of Hyde park) always does. The setting up of straw men is an ancient tradition and it won't be easy to eliminate it with mockery. However, I am not aware of all internet traditions, but know they are very numerous and I think a knee jerk demand for names and cites would be a very useful tradition in the corner of the internet occupied by you and Krugman and such like.

    See above the reference to "big-state people" who are explicitly identified with every opponent of austerity. I'm sure big-state people can be named -- they are people who always advocate higher government spending. Naming them, would make it clear that many opponents of austerity now are not big-state people. There are many people who usually advocate a smaller state and have opposed austerity in a liquidity trap, for examples, Greg Mankiw (http://gregmankiw.blogspot.co.uk/2008/12/case-for-payroll-tax-cut.html), Martin Feldstein (http://www.nationalreview.com/agenda/269159/romney-feldstein-stimulus-reihan-salam) & Tyler Cowen (head of the Mercatus center and very much a small state person and I'm tired of looking up cites).

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  10. "So how can small state people have the audacity to claim otherwise? Perhaps it reflects the power of an ideology that its protagonists want to see no evil."

    If it's put about by a group of well-to-do people who don't have any connection or familiarity with the lives of people on welfare, or on the sharp end of the court & prison system, or knee-deep in water, then they may very well sincerely not see how things are going badly. It would take intellectual effort to seek out evidence to correct their intuitive experience and there's not much incentive to do so.

    In theory that in incentive comes from the polls where those people can force their say on the establishment, but Labour and the media being part of the same set impedes the ideal way this might work. Instead Labour is fumbling an easy election like the Tories in 2010, and apathy, UKIP and the SNP are making up the difference.

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  11. "In many ways the bipolar view harks back to a bygone age, where - at least in Europe - there actually was a large constituency on the left that wanted a large state as a matter of principle."

    Even in that time, I think that there is not really defender of big state as a matter of principle - after all, the same people who were in favor of nationalizations were also against laws restricting the right to strike.

    I think that nobody is in favor of state intervention as a matter of principle - there are people who are against state intervention, and people who are in favor of specific types of state intervention; but someone who is in favor of a specific intervention will probably prefer non-intervention that an intervention of the opposite type (example: almost everybody who is in favor of anti-discrimination law / restrictions on immigration will prefer the laissez-faire to restrictions on immigration / anti-discrimination laws).

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  12. You can want to reduce the size of the state without austerity measures (tax cuts equal or greater to spending cuts.) The size of the deficit does not affect your views on the size of the state. Some government spending (like on drug prohibition) is wasteful and can be reduced without negative effects on the economy (basically, not all govt spending is the same, different effects, fiscal multipliers)
    The Reagan administration in the 1980s ran large deficits whilst being committed to reducing the size of the state, for example. Arguably this approach would be more popular than spending cuts while boosting the economy.

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  13. Pragmatism rules. Okay!

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  14. A real shame about the whole size of the state debate is the massive lack of nuance. Always missing from the debate is the distinction between transfer payments and actual state administration and services. An awful lot of what many people define as "the state" is just a set of transfer payments to various sets of people (the state pension especially).

    Also missing from the debate (with the exception of people like FlipChartRick) is the fact that some increases in the size of the state are inevitable due to demographic changes like a rising pensioner population.

    The final point I think worth considering is whether the private sector will continue to be able to find new human needs to fulfill. Why should we assume that the private sector will be able to expand to make use of the entire non state labour force?

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  15. With a bit more focus on house prices covering up economic problems, this good post could be further strengthened, I think.

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  16. It seems to me that small state people react to alternative ideas not as if they held this or that ideology, but instead with a religious fervour that seems to destroy their reasoning and common sense (it they ever had any). This can clearly be seen by their rapid descent into personal attacks, misquotations, misdirection and vilification. Or in the recent case of Farage's failure to arrive at an event on time, blaming immigrants for the traffic on the M4.

    Congested Motorways are a typical example of why small statism is no panacea. Its proponents wanted the move from rail to road, as it was said to stimulate and support individual freedom in the form of the motor car. However, to appeal to their voter base, they enforced planning restrictions that prevented the private sector from increasing supply to match demand while at the same time as reducing the building of affordable housing near to where people lived, thereby increasing travel distances and increasing efficiency killing congestion.

    This created a conveyor belt of house price inflation fuelled consumerism that pulled the wool (and cotton, and silk) over peoples’ eyes and gave them the false feeling that the economy was productive, when in fact the small statist ideas, when joined with the political exigencies needed to persuade people to vote for them, was in reality both reducing the flow through the arteries of the economy at the same time as furring those same arteries up with the fat of debt driven consumerism.

    The only sector that really benefitted from this in any big way was that which supplied the drug that kept the consumer addicts quiet - the debt dependent finance industry, now one of the major financial contributors to the political pushers of the small state.

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  17. Is there not a "right size" state where there is enough government stimulus (spending) in times of recession and and the right amount of fiscal and monetary contraction (taxation) in time of plenty to maintain employment and prices? The size of the state is a political outcome but poverty, unemployment and inflation (deflation) are an economic one. The pursuit of small/large, in my mind, should not result in mass unemployment, misery and reduced services for the many and increasing wealth for the few...which is what we have.

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  18. I have similar views about small state libertarians being dogmatic and incapable of acknowledging nuances. All dogmatists revert to ideology to save them having to think - but I don't think you have qualified or explained your arguments particularly well or clearly in the second half of this article. In what way does reducing government spending during a liquidity trap recession do real harm? Examples please.

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    1. So what did you not understand about the paragraph that began: "For the UK, the OBR estimates ..."?

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  19. Similar comments could be made about the "small state" people in the US, except that they don't run the whole show, and with any luck at all, won't any time soon. What is not stated explicitly in these comments is that the small staters come mainly from one class, the propertied and privileged class, and their view is that a large state necessarily reduces their wealth and power. They deny factual evidence, and lie about it, because their hold on power depends on fooling enough people who aren't small or large staters but who, in their ignorance, vote them into office. There is a reason that the right devotes so much of its wealth and energy in attempting to control the media.

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  20. Why can't a small-state person be for sensible fiscal expansion at zero lower bound? I see no contradiction.

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    1. I completely agree in theory, which is why I said "many small state people, like George Osborne" when talking about using the deficit as a cover. Unfortunately in practice most small state people appear to be anti fiscal stimulus.

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  21. I think you are ignoring a very big issue, despite actually mentioning it. Everyone who cares, remembers that the Economics profession turned on Maggie and predicted disaster from her policies - the famous "open letter", signed by what, three hundred luminaries? - and yet her reforms worked. They worked so well that she ended up changing the Labour Party almost as much as the Tories. Labour could only get elected in 1997 by promising to follow Tory spending plans.

    People remember this stuff, and rightly or wrongly they also remember Osborne inheriting an 11.5% fiscal deficit.

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    1. Much of what's thought about that Thatcher letter is a myth. The Thatcher did abandon monetarism and Thatchers policies did deepen the recession and led to the worst unemployment the UK's history.

      A shrinking deficit is what you'd expect in a recovery and in the case of this recovery what we have seen is terrible when you look at it relative to almost any recovery in the UK's history.

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  22. "The idea that private sector activity is always welfare enhancing and is best left alone was blown out of the water by the financial crisis."

    Is this really true? It could be and is cogently argued that the financial crisis was caused by a catastrophic failure of monetary policy that landed us at the ZLB and the liquidity trap (according to Keynesians) or with just not enough monetary activism with appropriate targets like NGDP Forecast Targeting (according to Market Monetarists). The specific S W-L claim here is clearly hyperbolic.

    And attacking small state people who believe "private sector activity is ALWAYS welfare enhancing" is a very, very easy target, as it is fairly easy to find some that aren't. It doesn't therefore follow that small state people are wrong in principle. A case of devious or, more likely, just sloppy logic.

    Also, speaking of logic, private activity may not always be welfare enhancing, but the alternative public activity could be even less welfare enhancing. Each case needs to be examined on its relative merits, not just in absolute terms.

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    1. In terms of monetary policy it's hard to see what the particular bad decisions were, UK NGDP from 2000-2007 looks surprisingly like a 5% target. I suppose it could be argued that the Bank needed a few more tools in it's toolbox, but an awful lot of what went wrong seems to have been caused by policy decisions that went beyond what we could reasonably call monetary policy.

      --'And attacking small state people who believe "private sector activity is ALWAYS welfare enhancing" is a very, very easy target, as it is fairly easy to find some that aren't.'

      Well there are always some easy targets in this case, but I'm not sure we need to be this pedantic. The financial crisis wasn't just the snake oil salesman kind of non welfare enhancing activity, it was a good sized chunk of GDP undertaken by well known and respected institutions.

      In terms of alternative public sector activities, I can think of a number of things that would be quite obviously welfare enhancing (childcare, the NHS, education).

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    2. It was precisely the abandonment of the nominal stability path of 2000-2007, that you rightly spot, that caused the GFC. Why was it abandoned? Because of an oil and commodity price shock, the global economy was sacrificed to what became an increasingly rigid 2% inflation target.

      If it had just been Northern Rock and a few US sub-prime lenders in trouble we could have called it idiosyncratic risks coming home to roost, but allowing this modest housing correction to turn into the Global Financial Crisis was a result of monetary policy allowing a collapse in aggregate demand. By not responding to a modest fall in aggregate demand with the usual easing of policy, but by tightening, we had the GFC. The US, UK and other monetary authorities were bllinded or transfixed by the oil price shock, and missed the bigger picture. This was inexcusable. And has led to the awful consequences we see in so many Western countries, mass unemployment. low/ nominal wage growth, negative real wage growth, increases in inequality, even foodbanks. It really is that bad.

      If I was being strongly ideological, I could say it was a direct result of the state control of the money supply. Private control would never have allowed an increase in demand for money to go unmet. But that is another argument, the policy mistake was made by whomever, but it was still a mistake.

      On the small state:The NHS is welfare enhancing as is state education, they are "good" things, that is not the question. Would healthcare and education be better if not done by the state is the question. Serious people can disagree on this, without emotion, name calling and mention of ideology.

      The current consensus in favour of state education and healthcare provision isn't necessarily correct, unless we accept the democratic theory of truth.

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    3. I love the way the years of mad, mad, lending to anyone with a pulse by the banks and the creation for years of a clearly massive bubble is not to blame, no - its the but the so called lack of interest rate easing 'in time' being the the problem when prices stopped going up and loans turned bad.

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  23. Absolutely agree about right sizing the state.
    That begs the question of deciding the right size.
    I'm a little concerned about arguing item by item on what the state does well or badly. That is bound to lead to compromise, which lose many useful functions of the state.
    Perhaps we ought to think more fundamentally about why government has evolved to be the size and shape it is, or was before "austerity".
    I haven't found/seen this idea in literature, but am reluctant to claim it as originally mine. I like to think of the state as a form of national insurance against the risks we cannot individually manage, or insure in the open market. For example, we cannot individually repel invaders, so we have defence forces; we cannot insure against all illnesses and accidents so we created the NHS (after the 1930s to which the OBR tells us we will return); the risk of unemployment is greatly increased without education, but we cannot educate our children, or afford to pay others to educate them, so we have state funded (sort of) schools and universities; we cannot defend our property, or fight crime or prosecute criminals, so we created a justice system; we cannot predict how long we will live, or how healthy we will be in old age, and we cannot all afford to invest in pensions, so we created state pensions; etc.
    All of the functions of government were created from need, usually because some risk became real and was deemed unacceptable/unfair for individuals to bear. There was no doubt a cost justification, and analysis of options for how best to share the risk. The selected option may no longer be optimal, due to changing demographics, or technology. It is feasible that the risk may have diminished, but unlikely that it will have disappeared completely.
    A valuable service economists and others might perform for society would be to begin a process of cataloguing the risks we expect government to share for us, and the costs of sharing versus the cost of individually bearing the risks. Thus, is it more cost effective across society for the individual to provide healthcare, or to share it through government?

    The current debate is framed in the business language of "efficiency". But we are not being efficient as a nation: we have many under utilised "human resources". Businesses, in the interests of optimisation, and efficiency, are stripping out middle management (up or out), and de-skilling workforces. What are those who fall short of the entrepreneurial elite to do to negotiate a fair solution? Competition is inevitable, but ultimately a destructive game. We need a government that supports us in negotiating with business, whether as employees or customers.
    How to reconstruct the conversation/economy so that businesses utilise all the resources of the nation? The pricing mechanism, as it must, is failing the majority in favour of the few.
    If inequality is allowed to prevail, with democracy ineffectual in representing the majority, then historically, there will be a revolution - not really desirable. The OECD/Picketty resolution of inequality by taxation, whether of high income or wealth, seems to me like a band aid, and will only further the argument of "tax is bad", justifying greater avoidance, and more evasion. We need to fundamentally change our values. Initially we need to start with a new language of fairness, individuality, and national risk sharing, with business serving us all not just the few.

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  24. A point that is rarely mentioned is that a significant portion of the fiscal costs of austerity have simply been deferred. In the NHS, for example, the effect of the dramatic slow-down in growth of public expenditure from 2010 has been cushioned by real-terms reductions to wages. In a period in which staff numbers fall, this is possible. But in the longer term, this is sure to result in recruitment and retention problems which will only be addressed by allowing wages to reflect underlying labour market conditions. Jeremy Hunt himself has recently acknowledged this. The required increase in public expenditure associated with the normalisation of wage increases, in the NHS and elsewhere in the public services, is a cost that is passed on by current policy-makers to future administrations and taxpayers.

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  25. Another worrying aspect of the small state ideology is that government failures become welcomed as illustrative of the superiority of the private sector. In the US, this has reached the point where failures are actively engineered by the Republicans in Congress, who are confident that "government" rather than their party will be blamed by a substantial section of the media / population.

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  27. Interesting reading - I have recently become pro-small State but open to alternative ideas (unlike many who hold this view).

    My reasons are thus:

    - Large state spending tends to remove individual responsibility and make the poor dependable on the State (it doesn't really help. long term - why get a job if you only earn £10 more than doing nothing??) - I'm NOT saying the poor are lazy, some are lazy like the rest in society.

    - We cannot afford the size of our State - just look at our national debt, it continues to grow and if interest rates rise, we are screwed, or we will inflate the debt away (hurting the poor), or borrow EVEN more (stealing it from the unborn because we'll never pay it off in our life time)

    - It encourages behaviour which leads to poverty, principally (and I know I'm going to get a hard time for this one), single parent households. If the State refused to pick up the bill (I say IF, I'm not a cold hearted git, but IF) people would change their behaviour. They would have less children, you would see less single households - BECAUSE, there wouldn't be the social net protecting them and thus encouraging this type of behaviour. PS - I really don't have a problem with single families (seriously, it's not a moral issue for me...just a logical argument for me). Single parent households is one (just one) of the central factors of poverty and State dependency.

    Like I said, I am open to another view point and I'm not locked into a fixed ideology - I just feel that big business and big State behave the same...like vultures, feathering their nest and not really helping anyone.

    Before somebody says it.... just tax the rich to pay for it all....the rich will do what they did in the 60s and early to mid 70s and take capital flight - where we tax more and receive less as a result. That doesn't help anybody. There is an argument that would should have a central / global tax system, now that MIGHT work.

    Small size States creates wealth because they are cheaper to run....you pay less tax, thus growing the private sector (thus transferring debt to the private sector, or not for profit sector). Like I say, I'm not locked into this view, it just seems logical to me....that's all.

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  28. The author of this article claims the cuts have done real harm and I completely agree with him on that ... but I would ask him this:

    What harm will it do, if we do not take responsibility for the national debt, longer term. If those who own our debt on the GILT markets started selling because they do not believe we can pay it back - what then. Hyperinflation? War? The way I see this (and I am open to be challenged on every count) - is that we have two choices. Pain now or worse pain later. If somebody can present a logical argument that we do not need to go through any pain, then I am all ears....seriously...I'd drop my views in a second. And are we in this mess because we have allowed the State to grow this far and thus people are no longer taking ownership for their own wealth and prosperity?

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    1. I agree with you about the need to take responsibility for government debt, and have spent a large amount of time discussing how that can be done. As a matter of fact, however, UK debt is high now because of the recession, and not because of past irresponsibility. Not opinion - fact.

      But your key question. Here is the logical argument. Cutting spending or raising taxes need not hurt the economy if monetary policy can offset its impact. It can do that in normal times. It finds it very difficult to do that when interest rates are at their lower bound. So postponing austerity until interest rates are safely above their lower bound makes sense. As macroeconomic arguments go, its pretty watertight.

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    2. Thanks - I've never considered it like that before. Are there any good books you would recommend?

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    3. Krugman: End This Depression Now
      Martin Wolf: The Shifts and the Shocks
      among others.
      Or you could just read this blog regularly!

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  30. Thanks - I'll do both....if there is a logical way out of this then I want to know about it...right now I'm moving right... not because I want to, but because I've lost faith with the left's ability to deal with the fundamental issues that keeps me up at night..our growing debt.

    I've just looked up the first book on Amazon and I will read it, however I'd already dismissed Keynesian economics...however, I will revisit it, if it can provide some answers. I don't think interests rates will rise...unless the government is forced into it..i.e. Inflation boils over. However, unlike you I am not an academic and I have not studied all the evidence, hence why I'm fully open to change my mind and therefore vote accordingly :-)

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