The crisis of government
Since the 2007-2009 financial crisis, many calls have been made (often in right-wing newspapers) that capitalism has failed; capitalism has died or that capitalism is in crisis. These claims are weaked by the government’s impact on society and markets, given the massive growth in government’s size and power. Public spending is estimated at 44.13% of GDP for FY 2012 (Actual FY2011 45.65% of GDP). This chart shows the growth over the last 110 years.
Government has become too big and like a bull in the proverbial china shop its weight and strength end up trampling everything and everyone. Society is a complex mechanism whose nuance is lost on goofy footed government. Bureaucracies don't manage anything well nor do they have an eye for economics. Indeed government cannot manage itself or the society it governs. As a result, government sets up unintended consequences because of its size, influence and power. It is not, as many would claim, a crisis of capitalism but rather a ‘crisis of government’. Society can no longer afford the bull. It is causing too much damage.
At every level of society, the state through its agency, government, subverts responsibility. For the individual, the group, the corporation; government intercedes at the behest of lobbyists, voters or the unseen dictates of bureaucrats. Bureaucrats and politicians are weighed down by the responsibility of having to be seen to do something - anything so long as they can fulfil their perverse self interest in maintaining perks, position and privilege. Indeed the term public servant has become an oxymoron.
Heavy hoof prints come in many forms. One big hoof print is the high level of taxation borne by you that brings low satisfaction for your taken money. Another large hoof print is the unintended consequences that occur when actions of government have effects that are unanticipated or unintended. Often cited but rarely defined, the law of unintended consequences illuminate the perverse unanticipated effects of legislation and regulation. In attempting to mend the unintended consequence of one policy, the result brings further consequence.
At the heart of all the bull lies the problem of economic ignorance by politicians. Our political class never realize the unintended consequences of their legislation and policymaking until it is too late. And having dug themselves and the nation into a giant dung heap, politicians lack the insight that they are the cause of the problem and lack the political will to find a way out. Hubris clouds judgment.
Overcoming the public choice dilemma
With the death of James Buchanan, it is interesting to reflect on some implications of public choice theory. Public choice theory presents a powerful explanation of why democracies tend towards government expansions that are difficult to reverse. As Dr Butler succinctly puts it: 'small groups with sharply focused interests have more influence in decision-making than much larger groups with more diffused concerns, such as taxpayers.'
Buchanan and the public choice school stress the importance of constitutional restraints on the size of government. Indeed, many Americans revere their Constitution’s ability to check the growth of government. Some of the Founding Fathers understood the public choice-style implications of large government and the tendency towards it, even if they did not express these fears in the same language.
But American constitutionalism has not been entirely successful in restraining the growth of government. For all its merits in guaranteeing enunciated political liberties, over time the US has seen such significant erosion of many of the economic liberties of the US that in many respects it is not greatly different from European 'social democracies' in terms of government spending or economic regulation.
Fortunately, it is not inevitable that large government will favour special interests. Public choice assumptions account for only part of the rationale for collective action. There are significant variations between and within different polities in relation to particular levels of government activity. There have been points when large group interests have coalesced to prevent further exploitation by special interests. Without siding with critics of Public Choice, it is important to recognise that its explanatory power is not total.
I would argue, following Robert Higgs (his fascinating lecture series is well worth a listen), that ideology also presents a major explanatory factor that runs counter to 'instrumental' interests. In the US, this would suggest that the growth of government and the 'failure' of the Constitution has been caused as much by the development of new ideologies such as Socialism, Progressivism, Keynesianism and so on as by pure instrumental interests (particularly because the results of such ideologies often run counter to the instrumental interests of many of those who support them). By the same token, the American Revolution itself emanated from a Whiggish culture and ideology which was imbued with a scepticism of powerful government and a desire for liberty. Ideology, as much as interest, also explains say, the abolition of the slave trade or Thatcherism.
Those advocating a smaller state should, therefore, take some heart that public choice theory does not provide a remorseless logic of concentrated special interests overpowering the general interest.
Public choice presents a powerful ideological reason to oppose big government and rent-seeking, and ideas about how to do so. But, alongside public choice critiques of government, we must also promulgate an ideology of a free society and limited government. As Higgs points out, prevailing ideologies can be shifted, sometimes rapidly.
Welfare cuts might save money, but where's the growth?
Following the benefits cap debate today, I can’t help but think that, yet again, the government has missed the point. Yes, the cap will save some money. Virtually everything the government spends money on needs to be cut. But where are the pro-growth policies? Where are the jobs that people on welfare are supposed to take? And where is the wholesale reform of the state that would allow the really big cuts to be made?
The country is broke. Government debt has topped £1 trillion. This year, we will have borrowed another £108.5 billion, only down £13 billion from the year before. The deficit reduction plan has only just begun, and we'll keep borrowing until 2018 at the earliest.
At a little under £3bn/year, the savings from capping the rise in benefits at 1% in cash terms (a real-terms cut, in other words) are better than nothing. But let’s not kid ourselves – they will be painful, especially since the fastest-rising prices are for things like food and home heating. Because we tax low-income workers and then give it back to them in the form of ‘tax credits’ (which are really just a cash transfer payment), many people who are in work will be affected.
On the other hand, public sector pay has been capped at the same rate, and it would be perverse for benefits to rise faster than Whitehall cleaners' pay. And this is no ordinary recession – the deficit is staggeringly big, and the global economy is moribund. Cuts really do need to be made, and I haven't heard any alternatives from the people opposing these ones.
As I wrote last week, the government has singularly failed to make the big reforms that would make public spending cuts work by promoting growth. There has been essentially no deregulation of enterprise; no simplification of the tax code to produce a revenue-neutral tax cut (for everyone who can’t afford a Westminster lobbyist, at least); no real, pro-construction reforms to the planning system; and no sense on immigration.
The principle of universal benefits is, thankfully, being chipped away, but as long as the health and pensions systems remain as they are there will not be any way to avoid people on £24,000/year paying for the healthcare and retirement of people who have earned three times that.
So long as the tax threshold is so low, the government’s claims to be ‘making work pay’ are a joke. Full-time minimum wage workers pay nearly £1,600/year in tax, which is then topped up by more welfare money (the mis-named ‘tax credits’, which will now be capped!). How different would today’s debate be if we weren’t taking low-income workers’ money away with one hand and giving it back as welfare with the other?
But these things are difficult. It’s easy not to touch business regulation, to keep immigrants out and leave reform of the welfare state to some other sods. Welfare cuts are very popular with voters, and it’s easy to see why. So, another frustrating day – some cuts, yes, but none of the reforms needed to grow the economy and make them work.
Mr Cameron's fuzzy electioneering
UK Prime Minister David Cameron MP says that he fully intends to to fight the next election (in 2015) and serve another full term as Prime Minister – meaning that he will be Prime Minister until 2020. But you can't take what any politician says quite literally.
For a start, Mr Cameron's vision of staying in power until 2020 depends on the Conservatives winning the 2015 election. This is by no means certain. But evenif the Conservatives did win in 2015, what would the future hold? A narrow victory would still leave Mr Cameron in a weak position. There would be plenty of people jostling for his job, and a series of knife-edge parliamentary debate would do nothing to strengthen his hand. A strong victory should, you might think, make his leadership unassailable. But would it?
There would still be doubt. What does he say a year or two before the 2020 election? That he will step down at the end of his term and let someone else fight the election? Changing leaders just before an election is no way for a party to win – particularly if the leadership contest has been divisive. The public need time to get used to party leaders and know what they are voting for.
Nor could he say he would fight the election and then let someone take over. The public won't take kindly to voting for one person then getting another. Could he perhaps say that he will fight the election, serve a couple of years, then let someone else take over then? Once more, the public might well ask why they should elect someone who quits halfway through the job.
Mr Cameron's problem is faced by all Prime Ministers. For the party, the ideal is to go halfway through your term of office, so that your successor can get experience and public familiarity before fighting the subsequent election. But you can't say this. And if your colleagues take you at your word that you intend to carry on too long, they are quite likely to give you the push anyway, as Margaret Thatcher, despite winning three elections, found out.
The only option for any Prime Minister loyal to his or her party is duplicity. You have to tell the public that you will fight for a second term and see it out, but you have to make way for your successor before your time is up. In any case, seven and a half years is plenty for a Prime Minister. Any longer and, no matter how great you are, your accumulated baggage starts to weigh you down.
Why the Resolution Foundation and IPPR can go boil their heads
There's a joint report out from the Resolution Foundation and the IPPR about the "Living Wage". It's here. And having actually read it, so you don't have to, I can confirm that the two groups should go boil their collective head. For they've missed the most obvious point of the matter they're whining about.
Their argument is that paying everyone a Living Wage would be better. It most certainly would be, no argument there at all. It would be even better if everyone earned more than that too. As we all do earn more than the living wage of, say, 1900. That we all get richer is known as progress and I'm all for progress. They then try to work through what it would cost to pay everyone that living wage. The answer being that, in companies that pay very few people below it not a lot. And in companies that pay many people below it a lot. Something I think we could have worked out without the aid of our proto-Labour MPs in the making.
However, the real reason they can go boil that part that they don't think with is that they manage to write their entire report without even mentioning that the Living Wage is a pre-tax number. They completely ignore that anyone earning minimum, living, or somewhere in between wages gets a couple of grand a year nicked off them to pay for duck houses and diversity advisers. Further, they completely ignore the point I've been screaming about here for several years now. If you didn't tax the minimum wage then it would be, to within pennies an hour, that very post-tax living wage that they're arguing for. In turn meaning that creating that living wage is well within the power of the political class, the Chancellor in particular. Simply raise the personal allowance for income tax and NI and there we are, job done, everyone in employment is not on the Living Wage.
And I['m afraid that anyone at all who wants to discuss this project and who is not willing to make this point will indeed be told to go boil their heads. Because, if you want to improve the incomes of the working poor then stop bloody taxing them so much. End of.
I will admit to being amused by one part of the report though. They point out that if instead of insisting on the full living wage we insisted upon payment of 90 % of it then....wait for it....it would cost companies less to do so. No **** Sherlock.
70 years on, it's time to dismantle the welfare state
This week sees the 70th anniversary of the Report of the Inter-Departmental Committee on Social Insurance and Allied Services, commonly known as the Beveridge Report, which is often credited as the underpinning of the welfare state in the UK (and several other countries which emulated the UK approach). To some extent this is an exaggeration as several aspects of the welfare state existed before 1942, especially in the area of education. Thus Beveridge represents a major expansion of an already existing shift away from private and philanthropic welfare and towards state provision.
It is salutary to note the timing - in 1942 Britain was in the midst of the greatest expansion of state activity it has ever witnessed. Government reached into and controlled nearly every aspect of socio-economic activity, allocating and planning resources, prices and labour to a minute degree. This philosophy, which proved highly successful for fighting a total war, was retained in peace time and employed as a mechanism for providing goods and services which had hitherto been privately provided. Many industries were nationalised and those areas of the economy which were left 'private' were heavily controlled. It was this state of affairs which promoted Hayek to publish The Road to Serfdom in 1943.
Without tracing the history of the past 70 years, it is clear that whilst some aspects of the World War II legacy have been rolled back - for instance the denationalisation of many industries during the 1980s - much of the philosophy of the Beveridge Report remains essentially intact. Whilst the nature of the welfare state has evolved, the mechanisms for provision are broadly identical to those introduced in 1945. For instance, the NHS remains a 'free-at-the-point-of-delivery' system in contrast to the Netherlands which dropped this approach and switched to a 'Bismarckian' one (nonetheless retaining the third-party payer problems inherent in all major health systems including the US one).
Readers of this website will hopefully already be convinced that the Beveridge inspired welfare state has been an unmitigated disaster for the provision of welfare in the UK, so I won't rehearse the arguments and the evidence. For those wanting a good introduction, James Bartholomew's classic The Welfare State We're In is a sensible place to start. Suffice to say, and despite the pernicious prejudice of many statists, Classical Liberals like myself care deeply for the plight of the poor, sick and needy. However, instead of clinging to failed and bankrupt systems which do far more harm than good to both recipients of welfare and society as a whole and especially to those at the bottom of society, we seek a different approach. Of course, those opposed to the status quo adopt a variety of positions: from those who argue for different modes of provision (school vouchers for instance); to those who desire a much smaller welfare state which only offers aid to the very poorest in society; to those who wish to do away with state welfare altogether
On the one hand, it is quite clear that opponents of the welfare state have - for the most part - utterly failed to convince the majority of the case for radical reform and retrenchment. Some tentative steps have been made in the field of school and higher education reform but healthcare, pensions and social protection remain largely untouched and any genuine and far-reaching attempts to do so would be political suicide. The forces of vested interests so clearly described in Public Choice Theory indicate why this is so - nonetheless the only means to overcome the barrier of vested interests is via the dissemination of ideas and ideological support so we must continue this effort. Moreover, recent years have seen the resurgence of the regulatory and license state - an activity which grew popular with the denationalisations of the 1980s and has been compounded with the recent Banking Crisis into a widespread belief that markets cannot function properly without state intervention. Many of these interventions are logically underpinned by the existence of state welfare provision; e.g. alcoholism is creating a burden on the NHS so should be prevented. Strike at the welfare state and we strike at the root of this approach as well.
On the other hand, we must continue to propose sensible mechanisms for moving from the status quo and towards private provision. As I have argued before, this is probably best done piecemeal. Given that opposition to the welfare state spans a spectrum of opinion, it is also sensible to move from reform of provision towards much greater privatisation and then ask the question of whether we need any state provision of welfare at all. One major area to target would be universality. This was one of the key principles of Beveridge and is one of the most unnecessary and expensive aspects of welfare provision - witness pensioners donating their winter fuel payments to charity. Universality was also introduced in order to engender support for the welfare state amongst the better off, remove it and that plank may also disappear.
Reformers must be careful, however. I would argue that the creation of so-called 'internal markets' and use of private providers in such areas as PPI and the NHS may actually be harmful to the cause of privatisation. Government is a poor customer and its size means it prefers to deal with large, equally bureaucratic companies such as Capita and Serco rather than SMEs - this assists large companies in dominating market sectors and leads to monopolistic outcomes. Bad privatisations such as the railways lead to the discrediting of privatisation in general. Failures discredit attempts to privatise properly as the many PPI scandals and the G4S scandal show. Pseudo-markets are likely to lead to exploitation of consumers by entrenched market-occupants protected by state regulation and intervention - witness the energy market or banking.
Even if everyone suddenly saw sense and decided to tear down the features of the welfare state, it would still take many years of consistent reform to return to private provision in order to build up the necessary markets and charitable endowments which the original government interventions so comprehensively destroyed. There would also have to be sweeping reforms in other areas: radical reform of planning laws to allow housing to become more affordable, large scale tax cuts and endowments funded by sell-offs of state property and - perhaps most critically - a return to sound money to allow people to save sufficiently for their futures instead of being impoverished by government inflationism. The welfare state has taken 70 years to build into its present appalling and oppressive form and it may well take 70 years or more to repair the damage, even if that were the general consensus. Still, there is no time like the present...
Is the Foreign Office fit for purpose?
Six years ago Keith Boyfield and I wrote a report for this Institute showing that both the EU options then under discussion, exit or accepting the EU as it then was, were sub-optimal. Since then both those options have worsened. We called the paper “EUtopia” and painted a picture of an EU that would be better for the members as a whole, better for the UK and, at least in our view, achievable over a longish process of charm, leadership and negotiation. The report was well received especially by the man who is now our Foreign Secretary.
While the report was still in draft, we had a meeting with the then chief of EU matters at the FCO. The person concerned was, as one would expect, both charming and intelligent. We asked about the FCO’s vision for the EU and the UK’s place within it and about the strategy for achieving that ideal. This was greeted with astonishment. The FCO, we were told, had not such forward plan, indeed no planning of any such sort, and should not be expected to operate in that way. The FCO, and the government on the FCO’s advice, purely reacted to events.
We pointed out that the French strategised their goals and worked purposefully towards them. That was why the EU worked so well for France. That cut no ice and the meeting broke up.
Talking with senior politicians, albeit not FCO civil servants, it seems little has changed. Indeed it may have got worse as the UK’s room for manoeuvre has reduced and we are more and more seen as sulking in a corner. Apparently, the FCO today thanks that no strategy for the EU is required because it is more or less right as it is. The FCO, after all wrote many of the rules including the Lisbon Treaty. For “FCO” today read “Brussels Fifth COlumn”.
Lib Dems apart, few others take that view: not politicians, not business people, and not the electorate. Doubtless the FCO justify their lofty view by claiming to be better informed than the common people. The reality is that these civil servants have forgotten the meaning of the word “servant” and that we pay their salaries.
We need an FCO that can visualise an EU that is best for the EU as a whole, best for the UK and achievable and then create a plan to achieve it. The UK has plenty of potential allies. Most member states should applaud a reduction in governance costs and accounts that auditors can approve. French peasant farmers could be brought back to the barricades to fight against EU farm subsidies going to the huge agri-corporations, not the small farmers. The biggest sufferers from the idiotic EU fish policies are the fishermen themselves. The German on the Hauptstraβe likes being a main contributor to the EU budget as much as we do.
Contrast that with sitting on the sidelines and being isolated as Mr Grumpy. The Eurovision song contest tells us all we need to know about how many votes the UK attracts in the modern Europe. Using the veto merely adds to the antipathy.
In short, the Foreign Office is not up to the job. We would probably be better off if we did not have one at all but that is not realistic. It should be replaced by an FCO that understands what the UK needs and wants and can create the charm offensive needed to achieve it.
A 30-month agenda
Madsen sets out on his own site what should be the agenda for the second half of this coalition government. In a speech to York University Conservatives he lists a programme that might reasonably be implemented by the coalition. It's radical stuff, starting with combining income tax and National insurance and moving on to allowing profit-making free schools and privatized universities, with a dash for gas along the way, and the removal of the cap on skilled immigration:
The first half has been dominated by the need to rescue the nation’s finances from the disastrous black hole into which Gordon Brown and his Labour government had sucked them. The second half should stress essential reforms and a pro-growth agenda. I set out a programme that might just fall within the range of what the coalition might be able to put through.
You can read the whole thing here (and it's quite short).
Milton Friedman on big business and big government
Thanks to Peter Twigg for bringing this excellent clip on the double threat to the people of big business allying itself with big government to my attention.